Risk Management and Crisis Response Blog

Ontario Appeal Court addresses the definition of a “security”: if it looks, walks and quacks like a duck, it MAY be a duck

Apr 28, 2020 9 MIN READ
Lauren Tomasich

Partner, Disputes, Toronto

Craig Lockwood

Partner, Disputes, Toronto

Lawrence E. Ritchie

Partner, Disputes, Toronto

Elie Farkas

Associate, Litigation, Toronto

In a decision released March 16, 2020 that may have implications for the regulatory treatment of certain financial instruments in Canada, the Court of Appeal for Ontario upheld the convictions of two appellants who had been charged with offences under the Ontario Securities Act (the “Act”). In Ontario Securities Commission v Tiffin, the Court had regard to the “catch and exclude” regime established by the Act – premised on specifically enumerated statutory exemptions to the legislative framework – and cautioned against judicial “tinkering” with key elements of complex regulatory schemes.

Among other things, the Court of Appeal refused to adopt the “family resemblance test” established by United States courts for determining whether particular instruments constitute securities, electing to leave the determination of exempt instruments to the legislature and regulators. By rejecting this U.S. test in the context of the Ontario regime, the Court of Appeal reaffirmed that the Act may extend even to private personal loans in certain circumstances.

This decision, made in the context of appeals stemming from a quasi-criminal prosecution, suggests that similar financial instruments may, in certain circumstances, be subject to differential treatment under the securities laws of Canada and the U.S.


Daniel Tiffin (“Tiffin”) was a financial advisor licensed to sell insurance and insurance-based investments. He had previously been registered with the Ontario Securities Commission (the “OSC”) to trade in securities. However, in 2009, Tiffin and his company, Tiffin Financial Corporation (“TFC”), became the subject of temporary cease trade orders by the OSC because of their suspected involvement in a fraudulent foreign exchange investment scheme. The cease trade orders precluded Tiffin and TFC from trading in securities or relying on exemptions in Ontario securities law. Following administrative proceedings, they received substantial financial sanctions and five year prohibitions on trading in securities or relying on exemptions.

Notwithstanding having been subject to the trading prohibitions, Tiffin subsequently solicited funds from his insurance investment clients allegedly for personal use and to keep his business running. In total, six of Tiffin’s clients agreed to lend a total of $700,000 to TFC in exchange for promissory notes secured against a “toy soldier collection” owned by TFC (the “Promissory Notes”).

Tiffin and TFC were subsequently charged pursuant to  Ontario’s Provincial Offences Act with three breaches of Ontario securities law in connection with the Promissory Notes: (i) trading in securities without registration; (ii) distributing securities without filing a prospectus; and (iii) trading in securities while prohibited.

First instance decision and the “family resemblance test”

At first instance before the Ontario Court of Justice, Tiffin and TFC conceded that they were not registered to trade in securities, did not file a prospectus in respect of the Promissory Notes, and were prohibited from trading in securities. Accordingly, the sole issue before the trial judge was whether the Promissory Notes constituted “securities” as defined in the Act.

Tiffin and TFC further conceded that the Promissory Notes technically fell within the definition of “security” under the Act, which includes any “note or other evidence of indebtedness”. However, they argued that the Court should adopt the “family resemblance test” established by the U.S. Supreme Court for determining whether particular debt instruments constitute “securities”. They argued that the Promissory Notes would not be considered securities under the U.S. test.

As the trial judge explained in his decision, under the “family resemblance” test a “note” is presumed to be a “security” unless, based on the examination of certain specified factors,[1] it bears a strong resemblance to one of an enumerated list of instrument types which have been recognized by U.S. courts as not constituting regulated securities.

Justice Kenkel found that the “family resemblance test”, which effectively permits courts to develop judge-made exemptions to the application of securities legislation, should be adopted in Ontario. In his view, a literal reading of the word “note” in the Act’s definition of “security” would lead to an overly expansive application of the Act. In particular, he noted that the Act is not intended  “to regulate all … commercial or private transactions”.

Applying the “family resemblance test”, Justice Kenkel found that the Promissory Notes did not constitute securities. Critically, he found that the Promissory Notes were similar to one of the exempt categories of notes enumerated in the U.S. case law, namely, notes that are secured by a lien on a small business or its assets. Having found that the Promissory Notes were not securities, Justice Kenkel acquitted both Tiffin and TFC of all charges. 

The Superior Court of Justice rejects the “family resemblance test”

On appeal, Justice Charney of the Superior Court of Justice reversed Justice Kenkel’s decision, replacing his acquittals with convictions. He found that there is no exemption under the Act for “simple private loan agreements” and that the trial judge erred by adopting the “family resemblance test”. Justice Charney held that the Act constitutes a comprehensive scheme for the regulation of securities in Ontario and it was not appropriate for courts to craft criteria to scale back the scope of the legislation (absent constitutional challenge).

In addressing why the “family resemblance test” would be inappropriate for adoption in Ontario, Justice Charney highlighted fundamental differences between the regulatory landscapes in the U.S. and Ontario. Principal among those differences is the fact that U.S. securities law expressly distinguishes between “commercial” and “investment” purposes when determining whether an instrument is a security –  “commercial” instruments are not securities. No such bright-line test exists under Ontario law as many “commercial” instruments are considered “securities” under the Act.

In his sentencing decision, Justice Charney sentenced Tiffin to six-months’ imprisonment and 24 months of probation and ordered that the lenders be repaid. Justice Charney found that a financial penalty would not be sufficient in Tiffin’s case because Tiffin still owed significant amounts in relation to previous violations and because he had exploited his clients from a position of trust.

Court of Appeal agrees that the “family resemblance test” has no place in Ontario law

Tiffin and TFC appealed Justice Charney’s decision to the Court of Appeal for Ontario. The Court dismissed the appellants’ conviction appeals but allowed their sentence appeals, finding that the Promissory Notes were clearly securities but that the lower Court’s sentence was “demonstrably unfit”.

The Court found that the scheme of the Act is one of “catch and exclude”, meaning that the Act defines key terms broadly and then enumerates specific statutory exemptions. It found, therefore, that a broad definition of “security” was in line with the object and intention of the legislature and cautioned against judicial “tinkering” with definitions central to complex regulatory schemes.

The Court went on to find that the “family resemblance test” was ill-suited to adoption into Ontario law, noting key structural differences between the Act and the U.S. Securities Exchange Act of 1934. Crucially, the Act provides no indication that Ontario legislators wished to distinguish between “commercial” and “investment” instruments when determining which instruments would be governed by the Act. Conversely, this distinction is foundational to U.S. securities law and drawing this distinction is a central purpose of the “family resemblance test”.

After upholding the appellants’ convictions, the Court of Appeal  set aside the prison sentence ordered by Justice Charney, while upholding his probation and restitution orders. Though the Court rejected the appellants’ argument that only “evasive and fraudulent offences” under the Act can attract prison sentences, it nonetheless found that a prison sentence was inappropriate in the instant case. Among other things, the Court highlighted that Tiffin did not deceive the lenders, conceded from the outset that he engaged in the conduct alleged, was likely to continue repaying his clients, received letters of support from five of the six lenders and expressed remorse. Further, he and TFC had already repaid over $350,000 to the lenders.

Implications for capital market participants

As Justice Charney noted in his decision, “it is unlikely that most of the investing public has any understanding what kind of lending transactions fall within the ambit of the Act and which do not.” Yet, this is no defence for market participants to non-compliance. Tiffin should serve as a reminder to parties involved in transactions, including lending transaction, to be cognizant of the potential application of securities laws to their conduct. Before taking steps that might trigger securities laws, parties should seek legal advice to ensure their conduct is excluded from the application of the Act.

Moreover, market participants engaged in transactions in more than one jurisdiction should be mindful that the same market activity may be subject to differential treatment and regulatory obligations, and should not assume otherwise. The Tiffin decision highlights the fact that while there is significant overlap between the regulatory approaches taken in the Ontario and U.S. securities regulatory regimes, respectively, the two regimes are distinct in a number of  fundamental respects. The Court of Appeal in Tiffin accepted a more expansive interpretation of the Act than the “family resemblance” approach, indicating that the Act’s precise jurisdictional scope is not easily defined. As a result, in this instance, the instruments at issue, which may have been excluded from the securities regime under U.S. law, were deemed to be captured by the Ontario scheme.

This case raises some important observations about the potential breadth of the scope of the Act. However, the decision should also be seen in the factual context of the case put before the Court: the accused was found to be a multiple-time contravener whose conduct under review was undertaken while subject to prior regulatory sanction, and the accused was found to have raised money from clients for his own benefit. Nonetheless, the decisions in the Tiffin case demonstrate that the consequences of improperly transacting in what may be found to be securities can be significant.


[1] In its appeal decision, the Court of Appeal identified the following factors as those considered by U.S. courts under the “family resemblance” test: (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.