Ontario Securities Commission v. Tiffin et al.

[Indexed as: Ontario Securities Commission v. Tiffin]

Ontario Reports

Court of Appeal for Ontario

L.B. Roberts, Harvison Young and Thorburn JJ.A.

March 16, 2020

150 O.R. (3d) 714 | 2020 ONCA 217

Case Summary

Securities regulation — Appeal — Standard of review — Appellants issuing promissory notes to investment clients while subject to cease trade order — Trial court applying family resemblance test to conclude that notes were not securities, and entering acquittals for charges under Securities Act — Superior Court of Justice accepting trial judge's findings of fact but refusing to apply family resemblance test and entering convictions — Whether notes were securities was a question of mixed fact and law, but only issue was one of statutory interpretation which was a question of law and so subject to correctness standard.

Securities regulation — Offences — Securities — Appellants issuing promissory notes to investment clients while subject to cease trade order — Trial court applying family resemblance test to conclude that notes were not securities, and entering acquittals for charges under Securities Act — Superior Court of Justice refusing to apply family resemblance test and entering convictions — Court of Appeal agreed that family resemblance test ought not to be imported to Ontario and upheld convictions — Securities Act, R.S.O. 1990, c. S.5, ss. 1(1), 122(1)(c).

Securities regulation — Penalties — Individual and corporate appellants appealing conviction and sentence for provincial offences under Securities Act — Individual appellant sentenced to six months' [page715] imprisonment with 24 months of probation and a restitution order — Custodial order set aside as demonstrably unfit — Financial penalties alone would have failed to meet sentencing objectives, so probation order restitution order upheld — Securities Act, R.S.O. 1990, c. S.5, ss. 1(1), 122(1)(c).

T was licensed to sell insurance and investment products through a company of which he was the sole officer, director and shareholder. He was also registered with the Ontario Securities Commission ("OSC") to trade in securities from 1983 to 1999. The OSC investigated T and his company for soliciting investments without proper authorization, and 2014 issued an order prohibiting them from trading in securities and from relying on exemptions from securities law for five years. While subject to the cease trade order, T solicited funds from his clients for his personal use and to keep his business operating. The clients were told about the OSC proceedings. Six clients agreed to loan a total of $700,000 on terms set out in 14 promissory notes. As a result, T and his company were charged under the Securities Act with trading in securities without registration, distributing securities without filing a prospectus, and trading in securities while prohibited. The only issue at trial was whether the promissory notes were securities. The trial judge found that they were not, and acquitted on all charges. On appeal to the Superior Court of Justice, the appeal judge concluded that the definitions and exemptions in the Securities Act deliberately cast a broad net that should not be interfered with absent a constitutional challenge. The appeal judge substituted convictions and, noting that a statutory financial penalty would be insufficient, sentenced T to six months' imprisonment with 24 months of probation and a restitution order. T and his company, seeking to apply narrower definitions under American law, appealed the convictions and sentence.

Held, the conviction appeal should be dismissed and the sentence appeal should be allowed.

The standard of review was correctness. Whether the instruments were securities was a question of mixed fact and law, but the appeal judge did not take issue with the trial judge's factual findings or how the law was applied to them. The dispute was with the definition the trial judge identified and applied. The central issue was thus one of statutory interpretation, being a question of law and therefore subject to a correctness standard.

The promissory notes were securities in that they were properly captured by the phrase "bond, debenture, note or other evidence of indebtedness" in s. 1(1) of the Securities Act. The scheme of the Act was "catch and exclude": defining key terms very broadly and then providing for many exemptions. The trial judge adopted the family resemblance test from American law, which involved asking whether the instruments resembled securities based on factors such as whether there was motivation to make a profit, whether the plan of distribution resembled common trading for speculation or investment, the public's reasonable expectation, and whether there was another regulatory scheme protecting the investor. Although there was no doubt that American securities law could be useful in interpreting Canadian securities legislation, it was neither necessary nor advisable to import the family resemblance test. There was no indication that the Ontario legislation sought to determinatively distinguish between commercial and investment interests as courts had held in the United States. Importing the family resemblance test into the interpretation of the term"security" would raise a risk of unintended consequences and litigation inherent when tinkering with a definition central to a complex regulatory scheme. There was no need to run such a risk given the statutory mechanisms through which the legislator had seen fit to achieve the goals animating securities regulation. [page716]

The custodial term was set aside but the 24-month probation order and the restitution order were upheld. The custodial sentence was demonstrably unfit in the circumstances. T did not attempt to deceive in the sense that he honestly revealed his desperate financial situation when he sought the personal loans. Although he did not plead guilty, he did acknowledge that he engaged in the conduct complained of and his defence was based on a question of statutory interpretation. He expressed remorse and was likely to continue repaying his clients. Five of the six recipients of the promissory notes filed letters of support. The appellants had repaid $90,500 of the principal plus $263,000 in interest. There was a history of non-compliance with the Act and the financial penalties alone would have failed to meet the applicable sentencing objectives.

Cases Considered:

British Columbia (Securities Commission) v. Gill, [2003] B.C.J. No. 587, 2003 BCCA 169, 180 B.C.A.C. 221, 11 B.C.L.R. (4th) 102, 120 A.C.W.S. (3d) 1058, 57 W.C.B. (2d) 52 (C.A.)
R. v. Bowman, [1948] O.J. No. 533, [1949] 1 D.L.R. 671, 92 C.C.C. 380 (Mag. Ct.)
Reves v. Ernst & Young, 494 U.S. 56, 110 S. Ct. 945, 108 L. Ed. 2d 47 (1990) (distinguished)
[R. v. Stevenson, [2017] A.J. No. 1342, 2017 ABCA 420, 61 Alta. L.R. (6th) 273, 143 W.C.B. (2d) 605, 2018 C.S.L.R. para. 900-719 (C.A.) [Leave to appeal to S.C.C. refused [2018] S.C.C.A. No. 54]](https://www.albertacourts.ca/docs/default-source/ca/2017abca420.pdf) (applied)

Other Cases Referred To:

Statutes Referred To:

Provincial Offences Act, R.S.O. 1990, c. P.33
Securities Act, R.S.A. 2000, c. S-4
Securities Act, R.S.B.C. 1996, c. 418
Securities Act, R.S.O. 1990, c. S.5, ss. 1 [as am.], (1) [as am.], 25 [as am.], 35 [as am.], 35.1, 53 [as am.], 73, 73.1, 73.2, 73.3, 74 [as am.], 122(1)(c), 127(1)5, 144
The Securities Exchange Act of 1934, 15 U.S.C. 78a

Authorities Referred To:

Gillen, Mark R., Securities Regulation in Canada (Scarborough, Ont.: Carswell, 1992)
Sullivan, Ruth, Sullivan on the Construction of Statutes, 6th ed. (Toronto: LexisNexis, 2014)

APPEAL by the accused from the order of Charney J. (2018), 142 O.R. (3d) 223, [2018] O.J. No. 2569, 2018 ONSC 3047 (S.C.J.) allowing an appeal from the acquittals entered on August 31, 2016 by Kenkel J. of the Ontario Court of Justice and substituting convictions, and from the sentence imposed, [2018] O.J. No. 4921, 2018 ONSC 5419 (S.C.J.).

Glen Jennings and Alex Zavaglia, for appellants. Jonathan Feasby and Matthew Britton, for respondent.

The judgment of the court was delivered by

HARVISON YOUNG J.A.: —

A. Overview

[1] The appellants, Daniel Tiffin and his company Tiffin Financial Corporation ("TFC"), borrowed money from six people who were clients and friends in amounts which totalled $700,000. The appellants provided them with promissory notes evidencing the debt. At the time of the loans, Tiffin was under significant financial pressure and was subject to a cease trading order issued by the Ontario Securities Commission ("OSC").

[2] With respect to these promissory notes, Tiffin and TFC were charged by the OSC with three provincial offences pursuant to s. 122(1)(c) of the Securities Act, R.S.O. 1990, c. S.5, namely, (i) trading in securities without registration; (ii) distributing securities without filing a prospectus; and (iii) trading in securities while prohibited.

[3] The central issue on this appeal is whether these notes were securities within the definition of the Act. The trial judge held that they were not, applying the test set out in Reves v. Ernst & Young, 494 U.S. 56, 110 S. Ct. 945 (1990). On appeal to the Superior Court of Justice, the appeal judge found that the notes were securities. He declined to apply the American "family resemblance" test from Reves in interpreting the term security under the Act and concluded that the trial judge erred in finding that the notes were not securities.

[4] For the following reasons, I would dismiss the appeal from these convictions. In brief, the definition of security in the Act is sufficiently broad to capture the promissory notes at issue here. While American law is a useful source of persuasive precedent in the securities context, the family resemblance test applied by the trial judge does not assist in the interpretation of the Act. The definition of security adopted by the appeal judge is supported both by the plain text of the Act and the logic of the regulatory scheme.

[5] In particular, the Act contains broad definitions coupled with equally broad exemptions which relieve vast numbers of transactions involving securities from compliance with its requirements. The appellants ask us to import the family resemblance test, not because of an absence of applicable exemptions to the transaction at issue, but rather because pursuant to an administrative order (that is, the cease trade order) they could not rely on these exemptions. That quarrel is properly directed at the order, not the definition of security in the Act, and, in the absence of any legislative intent for the kind of test developed in the United States, I decline to impose such a test so that the appellants can escape liability under the securities regime in this province.

[6] I would, however, allow the sentence appeal. While it was not an error in law to impose a custodial sentence per se, the sentence arrived at by the sentencing judge is demonstrably unfit.

B. Background

[7] Tiffin was licensed to sell insurance and insurance-based investment products through TFC, of which he was the sole officer, director and shareholder. Tiffin was also registered with the OSC to trade in securities from 1983 to 1999.

[8] The OSC investigated the appellants and others for soliciting investments in Rezwealth Financial Services Inc. ("Rezwealth") [page719] without proper authorization. In December 2009, the OSC issued a temporary order requiring the appellants to cease trading in securities and prohibiting them from relying on any exemptions in Ontario securities law. In making this order, the OSC relied on its power at s. 127(1)5 of the Act, which authorizes it to "order that any exemptions contained in Ontario securities law do not apply to a person or company permanently or for such period as is specified in the order". This order remained in effect until July 2014.

[9] The OSC commenced administrative proceedings against the appellants in connection with the Rezwealth matter. The OSC found that the appellants and others had traded in securities without registration and had illegally distributed securities. In July 2014, the OSC issued a final order imposing sanctions on the appellants. Under the terms of that order, the appellants were prohibited from trading in securities and from relying on exemptions from securities law for five years, in addition to monetary penalties and a restitution order.

[10] It was while he was subject to the cease trade order that Tiffin solicited funds from his clients for his personal use and to keep his business operating. The clients were told about the OSC's administrative actions and the consequent impact on the appellants' finances. Six clients agreed to loan funds, a total of $700,000, to TFC on terms set out in fourteen promissory notes signed by Tiffin on behalf of TFC. The notes provided for annual interest rates ranging from 10 per cent to 25 per cent and stated that they were secured against a "toy soldier collection" owned by TFC. It is these promissory notes that are at issue in these proceedings.

C. Decisions Below

(1) The trial decision acquitting the appellants

[11] At trial, it was undisputed that the appellants were not registered with the OSC, they did not file a prospectus, and they were prohibited from trading in securities by order. The only issue at trial was whether the promissory notes were securities as defined by the Act.

[12] The trial judge found that the promissory notes were not securities and entered acquittals. He accepted OSC's characterization of the Act as a "catch and exclude" regime, which defined the term security broadly and then provided statutory exemptions. However, the trial judge concluded that a definition of security that included the promissory notes at issue would cast too broad a net and would be inconsistent with the purposes of the Act.

[13] In reaching his conclusion, the trial judge adopted the family resemblance test from the Supreme Court of the United [page720] States' decision in Reves. This test involves asking whether the instruments resemble securities based on a list of factors including (1) whether there is motivation to make profit; (2) whether the plan of distribution resembles common trading for speculation or investment; (3) the public's reasonable expectation that the note is a security; and (4) whether there is another regulatory scheme that protects the investor. Based on these factors, the trial judge concluded that the promissory notes were not securities because they resembled notes secured by a lien on small business assets, which is one "family" of recognized non-security notes in Reves.

[14] Accordingly, the trial judge acquitted the appellants on all charges.

(2) The appeal decision substituting convictions

[15] The appeal judge concluded that the interpretation of the term "security" is a question of law, and the standard of review is correctness. He found that the findings of fact of the trial judge were not in issue on appeal.

[16] The appeal judge concluded that the trial judge erred in importing the family resemblance test into Ontario securities law. He disagreed that securities that appeared to fall within the statutory definition should nonetheless be excluded based on judicially crafted criteria. Contrary to the conclusion of the trial judge, the appeal judge concluded that the broad net cast by the definition of security was deliberate and consistent with the purposes of the Act and should not be interfered with absent a constitutional challenge for overbreadth. The appeal judge referred to the Alberta Court of Appeal's decision in R. v. Stevenson, which declined to import the Reves test into Alberta's securities regime: [2017] A.J. No. 1342, 2017 ABCA 420, 61 Alta. L.R. (6th) 273 (C.A.), leave to appeal to S.C.C. refused [2018] S.C.C.A. No. 54.

[17] The appeal judge also noted the significant differences between Ontario's securities regulation and that in the United States. Specifically, securities regulation in the United States differentiates between commercial and investment purposes in a manner that is consistent with the family resemblance test, but this is not determinative in Ontario's scheme. Further, the American statutory definition begins with the phrase "unless the context otherwise requires", an inherent limitation that is not present in the Ontario Act.

[18] The appeal judge declined to go through the family resemblance test in full, given that he had found it did not apply. However, he did point out specific elements of the trial judge's reasoning in applying the test with which he took issue. [page721]

[19] On the basis that the trial judge had erred in law and that the promissory notes were securities, the appeal judge allowed the appeal and substituted convictions.

(3) The sentencing decision

[20] The OSC submitted that an appropriate sentence would be from 12 to 15 months in jail followed by probation and a restitution order. Its submission was that a custodial sentence was required because the appellants had not paid previous financial penalties, the promissory notes were similar to notes used in the Rezwealth scheme and had been traded while an order prohibiting trading in securities was in place. The appellants submitted that a custodial sentence was unnecessary and would interfere with Tiffin's ability to repay the money owing. They submitted that the evidence indicated no intention to defraud or deceive anyone, Tiffin was not evasive, and five of the holders of the promissory notes wrote in support of Tiffin.

[21] The appeal judge noted the statutory maximum penalty of $5 million or imprisonment for a term of not more than five years less a day or both. He concluded that a financial penalty would not be sufficient in this case given the amount still owed in relation to the previous offences, and also because Tiffin had exploited a position of trust with his clients for financial gain. He accepted that the conduct here was different than in the Rezwealth scheme and that Tiffin did not intend to defraud or deceive anyone. He noted that the case law range for persons with previous convictions usually begins at nine months. Accordingly, the appeal judge sentenced Tiffin to six months' imprisonment, with 24 months of probation and a restitution order.

D. Issues

[22] The appellants were granted leave to appeal from their convictions: Ontario (Securities Commission) v. Tiffin, [2018] O.J. No. 6504, 2018 ONCA 953 (C.A.). Pursuant to s. 131(1) of the Provincial Offences Act, R.S.O. 1990, c. P.33, this appeal is limited in scope to the questions of law on which leave to appeal have been granted. As I noted above, the central question on the conviction appeal is the interpretation to be given to the term "security" within the statutory scheme pursuant to the Act.

[23] The appellants were also granted leave to appeal from the sentences imposed. They take issue with the sentence of six months' imprisonment for Tiffin, arguing that it was an error of law to impose a custodial sentence in the absence of a proven intent to defraud. [page722]

E. Conviction Appeal

(1) The appeal judge properly applied the correctness standard of review

[24] The preliminary question is the standard of review. In my view, the appeal judge correctly noted that there were no relevant facts in dispute, and that the central issue was one of statutory interpretation, which is a question of law. For this reason, he applied the standard of correctness.

[25] While the ultimate question in this case was whether these instruments are securities, which is a question of mixed fact and law, the appeal judge did not take issue with the trial judge's factual findings or how the law was applied to them, but rather with the definition the trial judge identified and applied. In my view, he correctly identified and applied the standard of correctness.

[26] The issue on this further appeal is the same as on the appeal below. Therefore, I review the appeal judge's determination of the meaning of the term "security" on a correctness standard.

(2) The applicable legal principles

[27] The principles of statutory interpretation are well established. The terms of the Act are to be interpreted in their entire context, in their grammatical and ordinary sense, harmoniously with the scheme and object of the Act and the intention of the legislator: Rizzo & Rizzo Shoes Ltd. (Re) (1998), 36 O.R. (3d) 418, [1998] 1 S.C.R. 27, [1998] S.C.J. No. 2, at para. 21.

(3) The security Act definition in context

[28] I accept that the scheme of the Act is "catch and exclude". In other words, the Act defines key terms very broadly, and thereby captures a great many instruments and activities in its wide regulatory scope, and then provides for many exemptions from the Act's requirements, discussed further below, to tailor this regulatory scope to its purposes.

[29] The term "security" is defined at s. 1(1) of the Act. It consists of a non-exhaustive list of 16 clauses expressed in general terms, evidencing an intention for breadth. The clause most centrally at issue in this case is clause (e), which reads "a bond, debenture, note or other evidence of indebtedness". Section 1 provides for only two explicit exceptions to clause (e):

(i) a contract of insurance issued by an insurance company licensed under the Insurance Act, and

(ii) evidence of a deposit issued by a bank listed in Schedule I, II or III to the Bank Act (Canada), by a credit union or league to which the Credit Unions and Caisses Populaires Act, 1994 applies, by a loan corporation or trust corporation registered under the Loan and Trust Corporations Act or by an association to which the Cooperative Credit Associations Act (Canada) applies.

[30] Consistent with the text of this definition, the Supreme Court has held that a promissory note is a security for the purpose of a similar statute in Saskatchewan: see Duplain v. Cameron, [1961] S.C.R. 693, [1961] S.C.J. No. 49, at p. 711 S.C.R.

[31] The Act sets out broad exemptions from its core requirements, which require registration prior to trading in securities and the issuance of a prospectus prior to trading in securities: ss. 25, 53. Exemptions cover, by way of example, securities issued by governments and banks, secured by a security agreement or mortgage, distributions to accredited investors purchasing securities as principals, family members, friends, business associates and their related corporations, an isolated distribution of securities and the distribution of short-term debt instruments: see, e.g., ss. 25, 35, 35.1 and 73-73.3; Prospectus Exemptions, OSC NI 45-106, (2009) O.S.C.B. (Supp. 5) 1, ss. 2.4, 2.5, 2.6.1, 2.35. Therefore, notwithstanding that a certain instrument may be a security, it may not trigger the application of one or more core requirements of the Act.

(4) The non-application of the exemptions to the appellants

[32] The appellants point out that, according to the terms of the cease trade order which was issued against them at the relevant time, they were not allowed to shelter under these exemptions.

[33] It is, in effect, for this reason that the appellants seek to have us apply the American law as set out in Reves that narrows the definition of security from the outset. If these notes were not securities, the appellants were not subject to the requirements of being registered, filing a prospectus, or trading while prohibited. The appellants argue that interpreting the definition of security as being broad enough to include these notes, notwithstanding the existence of the broad and numerous exemptions in the Act, would give rise to unjust results because it would sanction activities that, in their submission, should not be subject to sanction under the securities regime.

[34] The difficulty in giving effect to this argument is that the appellants' conduct may well have been exempted from the requirements of the Act had they not been subject to an order forbidding them from relying on such exemptions. For example, at the relevant time, Ontario securities law contained a private issuer exemption exempting distributions of securities by those who met the definition of "private issuer" to close friends and business [page724] associates from the prospectus requirement: Prospectus Exemptions, s. 2.4(2). Additionally, the notes themselves purported, by their terms, to rely on the so called "accredited investor" exemption. The exemption, provided for at s. 73.3 of the Act, exempts some distributions to financially sophisticated parties identified in that section and in the Prospectus Exemptions.

[35] In my view, the injustice caused by the unavailability of the exemptions, if any, is properly attributed to the order, and is not controlling of the definition of security in the Act. Moreover, in addition to any other route the law may provide to challenge such an order, interested parties can apply to the OSC to exempt specific trades from statutory requirements and affected parties may also apply to revoke or vary the order: Securities Act, ss. 74, 144. The appellants did not avail themselves of these procedures.

(5) Reves and the applicability of American law

[36] The appellants submit that the definition of security in the Act is further limited by the principles propounded in the Supreme Court of the United States' decision in Reves. In Reves, that court set out the so-called family resemblance test in order to determine whether a given note fell within the definition of security for the purposes of the American legislation. Under that test, a note is presumed to be a security unless it bears a strong resemblance to judicially recognized "families" of instruments: Reves, at p. 65 U.S. To determine whether a strong resemblance exists, the court is to look to the motivations of the parties, the plan of distribution, the reasonable expectations of the investing public and the existence of other applicable regulatory schemes that would reduce risk: Reves, at pp. 66-67 U.S.

[37] For the following reasons, I disagree with the appellants and I decline to import the family resemblance test into the definition of security in the Act.

[38] To begin with, there can be no question that American law can be useful in interpreting Canadian securities legislation. That is because both legislative schemes have similar purposes and intend to address similar issues: see Pacific Coast Coin Exchange of Canada Ltd. v. Ontario (Securities Commission), [1978] 2 S.C.R. 112, [1977] S.C.J. No. 117, at pp. 126-28 S.C.R. Both seek to address the challenge of casting a broad enough regulatory net to protect the public and ensure the stability of the financial system without being so broad as to capture activities unconnected to these goals. [page725] In particular, the emphasis on disclosure in the federal securities regime in the United States had a considerable influence on the development of securities regulation in this province: Mark R. Gillen, Securities Regulation in Canada (Scarborough, Ont.: Carswell, 1992), at p. 57.

[39] The specific mechanisms the two systems have chosen to address the challenge, however, are not identical. Since the origins of modern securities regulation in the early 20th century, the securities regimes on either side of the border have been developed by distinct legislators and regulators shaped by distinct constitutional contexts and accountable to distinct polities. This context must be borne in mind when, as here, this court is asked to interpret the intention of the Ontario legislator in line with jurisprudence from another jurisdiction.

[40] In particular, it is very clear that federal securities regulation in the United States was only intended to regulate investments, and not to create a broad federal remedy for all fraud: Reves, at p. 61 U.S.; Marine Bank v. Weaver, 455 U.S. 551, 102 S. Ct. 1220 (1982), at p. 556 U.S. Accordingly, courts in that country have distinguished between investment instruments, which are subject to the regime, and commercial instruments, which are not. The family resemblance test applied in Reves is the manner in which that court chose to draw this distinction. The parties disagree on the extent to which this distinction is applicable to an interpretation of the Act in Ontario.

[41] Three key differences exist between the Act and The Securities Exchange Act of 1934, 15 U.S.C. 78a, considered in Reves, such that the family resemblance test is not helpful in interpreting the meaning of the term security in the Act. First, the definition in the Act, at s. 1(1), opens with inclusive language"'security' includes . . .", whereas the definition in The Securities Exchange Act of 1934, at s. 3(10), opens with language indicating an exhaustive definition "'security' means. . .". The Act therefore contains an indicator of breadth not present in the United States' statute: Ruth Sullivan, Sullivan on the Construction of Statutes, 6th ed. (Toronto: LexisNexis, 2014), at paras. 4.34-4.39.

[42] Second, the definitions in The Securities Exchange Act of 1934 are preceded by the phrase "unless the context otherwise requires": s. 3. The intention of a legislator in using these words will not always be to "create powerful discretion" for courts to craft additional exemptions to a statutory definition, as the OSC contends. However, the Supreme Court of the United States has in fact relied upon these words, at least in part, to justify a narrowing of the otherwise expansive definition of security: Weaver, at p. 556 U.S. No such wording is evident in the definition in the Ontario Act [page726] and I cannot, therefore, follow the Supreme Court of the United States' reasoning in interpreting it.

[43] Third, the respective approaches of the two statutes to short-term debt instruments demonstrate a broader definition of security in this jurisdiction. In The Securities Exchange Act of 1934"any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months" is specifically excluded from the definition of security: s. 3(10). By contrast, in Ontario, there is no such explicit exclusion from the definition of security in the text of the Act. Rather, the OSC, by rule, exempts a distribution of a similar class of short-term debt that meets certain criteria from the prospectus requirement in the Act: Prospectus Requirements, s. 2.35.

[44] This distinction is significant. It exemplifies a difference in legislative structure. Congress has made clear its intention to exclude these short-term debt instruments, which may be viewed as commercial, from the scope of this statute altogether, by carving them out of the definition of security. In Ontario, meanwhile, there is no indication that the legislator intended short-term debt instruments to be understood as anything other than securities. The approach taken by the regulator in this province is to enact rules exempting them from the prospectus requirement in the Act, rather that excluding them from the ambit of the scheme as a whole.

[45] These structural differences militate against importing the family resemblance test. To do so would risk undermining the legislator's chosen scheme expressed in the Act, which, as discussed above, is to broadly cast its regulatory net and then exempt those activities it does not wish to regulate. There is simply no indication that the Ontario legislator wished to determinatively distinguish between commercial and investment instruments as courts have held in the United States.

[46] As the parties noted before this Court, appellate courts in Canada have come to different conclusions regarding the applicability of Reves. In British Columbia (Securities Commission) v. Gill, [2003] B.C.J. No. 587, 2003 BCCA 169, 11 B.C.L.R. (4th) 102 (C.A.), the British Columbia Court of Appeal applied the Reves family resemblance test in reaching the conclusion that the documents at issue, namely, receipts, financial summaries and personal loan agreements evidencing debt, were securities for the purpose of the Securities Act, R.S.B.C. 1996, c. 418. I note that the Gill decision considered whether an administrative decision-maker's interpretation of the B.C. Securities Act was reasonable, and it referred to the test in Reves to illustrate the reasonableness of that decision. The court did not rely on Reves to narrow the definition of security, but rather relied on it to support its breadth. [page727]

[47] In the more recent case of Stevenson, the Alberta Court of Appeal declined to import the family resemblance test into that province's law, given that the "numerous conditions and exemptions" in the Securities Act, R.S.A. 2000, c. S-4, obviated the need for "judicially created exemptions" like those in Reves: at para. 16. That appeal court upheld the decision of the summary conviction appeal court judge concluding that the loan agreements, which were the subject of the regulatory prosecution, were "evidence of indebtedness" and therefore securities for the purpose of the very similar definition of security in the Alberta Securities Act: at paras. 4, 21.

[48] I agree with the conclusion in Stevenson. In my view, importing the family resemblance test into the interpretation of the term"security", would raise a risk of unintended consequences and litigation inherent when tinkering with a definition central to a complex regulatory scheme. Moreover, and importantly, there is no need to run this risk given the statutory mechanisms through which the legislator has seen fit to achieve the goals which animate securities regulation. In short, while American securities jurisprudence may be a useful source of persuasive authority in some cases, it is not necessary or advisable to import the family resemblance test into the definition of security in the Ontario context.

[49] To be clear, I do not disagree with the appellants' submission that a legislative provision that is overly broad on its face can, in appropriate cases, be "read down" or interpreted in a manner that is narrower than the bare language of the text: Canada Post Corp. v. Canadian Union of Postal Workers, [2019] S.C.J. No. 67, 2019 SCC 67, at para. 59; Blue Mountain Resorts Ltd. v. Ontario (Ministry of Labour) (2013), 114 O.R. (3d) 321, [2013] O.J. No. 520, 2013 ONCA 75 (C.A.), at para. 29; Montréal (City) v. 2952-1366 Québec Inc., [2005] 3 S.C.R. 141, [2005] S.C.J. No. 63, 2005 SCC 62, at para. 14. This is just another way to express the principle that the words of legislation must always be read in context and harmoniously with the intention of the legislator. This exercise is distinct from reading down as a constitutional remedy: Sullivan, at para. 7.10. In the former case, the courts are interpreting the legislation in order to properly give effect to the true intention of the legislator. In the latter case, the courts are adjusting the scope of the legislation to conform to the Constitution notwithstanding the legislator's intention. As I have discussed, however, the scheme of the Act is such that the broad definition of security is consistent with its object and the intention of the legislator. Accordingly, the purposive reading does not assist the appellants. [page728]

(6) Conclusion: The promissory notes are securities

[50] In summary, the promissory notes at issue in this case are securities. They are properly captured by the phrase "bond, debenture, note or other evidence of indebtedness" in the definition of security for the purposes of the Act: s. 1(1). While the appellants may have been able to rely on exemptions from the requirements in the Act in respect of these transactions, these exemptions were not available to them in this case because of the cease trade order. This does not warrant interference with the definition in the Act on which the legislator has chosen to ground its scheme.

F. Sentence Appeal

(1) The principles of sentencing for regulatory offences

[51] This appeal arises from a regulatory prosecution. I begin by summarizing the principles applicable to the sentencing for these offences.

[52] Unlike criminal offences, regulatory offences are not prosecuted because they are inherently abhorrent, but rather because compliance is necessary to achieve the legislator's public interest goal: Ontario (Ministry of the Environment, Conservation and Parks) v. Henry of Pelham Inc., [2018] O.J. No. 6434, 2018 ONCA 999 (C.A.), at para. 33. Consistent with the difference in purposes, while the sentencing of regulatory offenders remains multi-factorial, the principle of deterrence is the paramount consideration: Henry of Pelham, at para. 38.

[53] Imprisonment for regulatory offences may sometimes be necessary to achieve this purpose. As Cory J. said in R. v. Wholesale Travel Group Inc., [1991] 3 S.C.R. 154, [1991] S.C.J. No. 79, at p. 250 S.C.R.:

Regulatory schemes can only be effective if they provide for significant penalties in the event of their breach. Indeed, although it may be rare that imprisonment is sought, it must be available as a sanction if there is to be effective enforcement of the regulatory measure. . . . The potential for serious harm flowing from the breach of regulatory measures is too great for it to be said that imprisonment can never be imposed as a sanction.

[54] As in criminal law, the sentence must be proportionate to both the gravity of the offence and the degree of responsibility of the offender: Ontario (Ministry of Labour) v. New Mex Canada Inc. (2019), 144 O.R. (3d) 673, [2019] O.J. No. 227, 2019 ONCA 30 (C.A.), at paras. 67-68. Moral blameworthiness can be relevant to the sentencing of a regulatory offender, given that it is probative of the degree of responsibility of the offender, notwithstanding the fact that regulatory offences generally involve less moral blameworthiness: New Mex, at paras. 66, 69. [page729]

[55] The principle of restraint requires the sentencing court to apply a measured response to determining a sentence that best satisfies the purpose and principles of sentencing, as in criminal law: New Mex, at paras. 81-82. The application of restraint generally means that incarceration for regulatory offences is rare, but this is a descriptive observation, not a prescriptive one, and it is not an independent principle in sentencing: New Mex, at para. 85. It flows from the fact that deterrence can generally be achieved with fines.

[56] In short, regulatory offenders are not sentenced in a manner wholly distinct from criminal offenders. The principles of proportionality and restraint still apply. The differences flow from the distinct purpose underlying regulatory offences, which requires a greater emphasis on deterrence and generally involves lower moral blameworthiness than in the criminal context.

(2) The principle from Bowman

[57] The appellants rely on the decision in R. v. Bowman, [1948] O.J. No. 533, [1949] 1 D.L.R. 671 (Mag. Ct.), to claim that there is a "clear standard" that only evasive and fraudulent offences under the Act warrant incarceration. I do not accept this submission. First, I do not read Bowman as creating this kind of bright line rule. Second, this submission runs contrary to the principles of sentencing in regulatory offences, which are inherently contextual.

[58] In Bowman, Hanrahan P.M. gave very brief reasons for sentence in which he sentenced two brokers to imprisonment for violating the Act. He distinguished, at p. 672 D.L.R., between careless and intentional offenders in terms of the appropriate sentence:

When breaches of the Act such as these occur, dealing with failure to register or to file required reports designed to protect the investing public, the dividing line between imprisonment and monetary punishment as the appropriate penalty must be in which class the offender falls -- the merely careless or the designedly evasive delinquent, who is bent on defrauding the public unhindered by the watchful supervision of the Commission's investigators.

[59] This passage has been cited with approval by the Ontario Court of Justice and the provincial courts of other provinces.

[60] In some cases, the principle is applied in the rigid manner advanced by the appellants. That is, the court determines whether the offender being sentenced is a "merely careless" offender or is a "designedly evasive delinquent" and this is determinative of whether a sentence of imprisonment is imposed: see, e.g., R. v. Lewandosky, [1997] M.J. No. 471, 36 W.C.B. (2d) 152 (Prov. Ct.), at paras. 12-13, 23; Autorité des marchés financiers c. Veillet, [2014] J.Q. no 2819, 2014 QCCQ 2358, at para. 47. [page730]

[61] Other cases do not go this far, and instead characterize Bowman as establishing a spectrum of blameworthiness on which a specific offence is placed to determine the appropriate penalty: see, e.g., R. v. Tulsiani, [2017] O.J. No. 3304, 2017 ONCJ 430 (C.J.), at paras. 30-32; R. v. Perch, [2006] M.J. No. 162, 203 Man. R. (2d) 300 (Prov. Ct.), at paras. 19-20; R. v. Edgar, [2000] B.C.J. No. 2749, 2000 BCPC 215 (Prov. Ct.), at para. 14. In Autorité des marchés financiers v. Greeley, [2010] Q.J. No. 3391, 2010 QCCQ 2879, Mascia J.C.Q. distills Bowman as merely requiring an assessment of moral blameworthiness: at para. 29.

[62] In my view, the rigid application of Bowman is at tension with the proper approach to the sentencing of regulatory offenders. Moral blameworthiness is relevant to the sentencing of regulatory offenders because it is probative of the responsibility of the offender to which the sentence must be proportionate: New Mex, at para. 69. However, the sentence must also be proportionate to the gravity of the offence, which is unaccounted for in the Bowman principle. In other words, moral blameworthiness is relevant, but it cannot be the sole focus of the regulatory sentencing judge.

[63] The regulatory sentencing court, according to the principles of proportionality and restraint, must impose the sentence required to optimally achieve the sentencing goals, of which deterrence is paramount. It is unclear how the comparison of the offender to the ideal types of the "careless offender" or the "designedly evasive delinquent" assists in coming to a fit sentence in the circumstances of a given case. It might be contrary to the principle of restraint, for example, to rigidly impose imprisonment on offenders based on their intention when the goal of deterrence could be achieved with a fine. Equally, a fine may not be sufficient to achieve the goals of sentencing in some cases where fraud is not made out. Sentencing is inherently contextual.

[64] For this reason then, it would be contrary to established sentencing principles to hold that Bowman restricts a sentencing judge's discretion to this one consideration above all others. The better formulation of the Bowman principle is that intention may be a relevant consideration in determining whether a custodial sentence is necessary to achieve the goals of sentencing.

(3) The sentence is demonstrably unfit

[65] The appellants also argue that the sentence of six months' imprisonment for Tiffin was demonstrably unfit in the circumstances. I agree.

[66] This court can vary the sentence on appeal if it is demonstrably unfit: R. v. Lacasse, [2015] 3 S.C.R. 1089, [2015] S.C.J. No. 64, 2015 SCC 64, at para. 11. A sentence will be [page731] demonstrably unfit if it is clearly excessive or inadequate or if it represents a substantial and marked departure from a proportional sentence properly arrived at based on the correct application of the principles and objectives of sentencing: at para. 52.

[67] I do not agree with the sentencing judge's reasons for imposing a custodial sentence in addition to the probation order. In the unusual circumstances of this case, I find that a custodial sentence is manifestly unfit. In particular,

(a) Mr. Tiffin did not attempt to deceive in the sense that the evidence indicates that he honestly revealed his desperate financial situation when he sought a personal loan from his friends/clients;

(b) as noted by the sentencing judge [[2018 ONSC 5419, [2018] O.J. No. 4921, at para. 40]](https://www.ontariocourts.ca/decisions/2018/2018ONSC5419.htm)"While Mr. Tiffin did not plead guilty, he did acknowledge that he engaged in the conduct complained of, and his defence was based on a question of statutory interpretation. While not quite a mitigating factor, it places this case closer to the guilty plea category than some of the longer sentence cases relied on by the OSC";

(d) five of the six recipients of the promissory notes filed letters of support;

(e) the appellants have repaid $90,500 of the principal amount of the loan, and $263,000 in interest, for total payments of $353,500; and

(f) Mr. Tiffin has expressed remorse.

[68] There is a history of non-compliance with the Act, which led to the cease trading order and not all of the money has been repaid. Having said that, the financial penalties alone would fail to meet the applicable sentencing objectives.

[69] While the appeal judge cited the relevant principles, the sentence is disproportionate to the point of being demonstrably unfit. There is relatively little in the sentencing reasons to justify the custodial sentence. The appeal judge cited R. v. Da Silva, [2012] O.J. No. 2073, 2012 ONCJ 279 (C.J.), vard [2013] O.J. No. 149, 2013 ONSC 260 (S.C.J.), for the proposition that the applicable sentencing range where there is a history of non-compliance begins at nine months.

[70] This decision does not hold that nine months is the starting point for the sentencing of any recidivist. The [page732] sentencing judge in Da Silva said"These are not first offences, so they would not attract periods of six months as did the offenders in R. v. Casteneda. I agree that given Mr. Da Silva's history of Securities Act violations, the range would start in these circumstances at [nine] months": at para. 29 [footnote omitted]. Da Silva's history of non-compliance was markedly worse than that of Tiffin. Da Silva had been under three separate cease trade orders relating to various schemes at the time he committed the offences before the sentencing court: at para. 5. Further, unlike this case, his activities were intentionally deceitful: at paras. 3 and 29. It was in those circumstances that a sentence of nine months' imprisonment was the starting point.

[71] A review of relevant case law in Ontario securities matters reveals sentences that are significantly below nine months. In Ontario (Securities Commission) v. DaSilva (2017), 139 O.R. (3d) 598, [2017] O.J. No. 3902, 2017 ONSC 4576 (S.C.J.), an offender with a significant history of non-compliance was sentenced to three months following a trial for similar offences. The sentence was upheld on appeal: at para. 79. While there was a smaller amount of money at issue in that case, the offence involved dishonesty, specifically using a fake name to solicit investments: at paras. 68 and 71.

[72] Further, in R. v. Schwartz, [2013] O.J. No. 3630, 2013 ONSC 5031 (S.C.J.), a 90-day intermittent sentence was upheld on appeal for an offender with a history of misconduct who pleaded guilty to violating an OSC order by committing fraud: at paras. 14 and 30. In R. v. Castaneda, [2008] O.J. No. 712, 2008 ONCJ 69 (C.J.), a six-month sentence was imposed on an offender who pleaded guilty to offences that also made out criminal fraud and imposed significant hardship on investors: at paras. 19 and 33. By contrast, in this case five out of six lenders wrote in support of Tiffin and the appeal judge found that he was truthful with them in soliciting the funds. While the appellants did not plead guilty, the appeal judge found that this was "closer to the guilty plea category" given the circumscribed nature of the trial.

[73] The OSC was not able to direct us to a precedent where a custodial sentence was imposed for conduct that was found not to be in any way deceitful. This is a unique mitigating factor that distinguishes the offences on appeal from all custodial precedents to which we were referred. A fit sentence must reflect the appellants' reduced responsibility for the offences that flows from the absence of deceit in their conduct.

[74] In light of this case law and the unique circumstances of this case, six months' incarceration is a demonstrably unfit sentence [page733] and cannot stand. I would set aside the custodial term but uphold the 24-month probation order as well as the restitution order with the same terms, as outlined below:

that the appellants not commit the same or any related or similar offence, or any offence under a statute of Canada or Ontario or any other province of Canada that is punishable by imprisonment;
that the appellants appear before the court as and when required;
that the appellants notify the court of any change in their address;
that the appellants report to a probation officer if and when directed to do so by the probation officer; and
that the appellants not trade in any "securities" as that term is defined in the Act.

[75] In addition to the restitution order below, this probation order is sufficient to achieve the objectives of sentencing in the circumstances of this case.

G. Conclusion

[76] I would dismiss the conviction appeal and allow the sentence appeal. I would set aside the custodial sentence and uphold the probation and restitution orders.

Appeal from conviction dismissed and from sentence allowed.

Notes

1 An even broader exemption for distributions to close family, friends and business associates was subsequently added to the rules: ss. 2.5, 2.6.1.

Ontario Securities Commission v. Tiffin, 2020 ONCA 217

Case Summary

Ontario Securities Commission v. Tiffin et al.

Case Summary

A. Overview

B. Background

C. Decisions Below

(1) The trial decision acquitting the appellants

(2) The appeal decision substituting convictions

(3) The sentencing decision

D. Issues

E. Conviction Appeal

(1) The appeal judge properly applied the correctness standard of review

(2) The applicable legal principles

(3) The security Act definition in context

(4) The non-application of the exemptions to the appellants

(5) Reves and the applicability of American law

(6) Conclusion: The promissory notes are securities

F. Sentence Appeal

(1) The principles of sentencing for regulatory offences

(2) The principle from Bowman

(3) The sentence is demonstrably unfit

G. Conclusion

End of Document

Cited By (2 cases)

R. v. Dave, 2023 ONCJ 351

R. v. DeBoer, 2021 ONCJ 690

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