Catch and Exclude: The Ontario Court of Appeal reaffirms the Canadian approach to defining a “Security”
April 13th, 2021
In late 2018, I wrote a summary of the Ontario Superior Court’s decision in OSC v Tiffin, 2018 ONSC 5419. In that case, a 6 month custodial sentence was imposed on a trader for trading in promissory notes despite being under a trading ban. Justice Charney ruled on whether to import the “family resemblance” test from US case law to determine whether a promissory notes amounted to a securities. Under that test, courts would use a contextual approach to determine if something constitutes a security. Ultimately the “family resemblance” test was not adopted into Canadian law. Instead, courts should rely on the definitions set out in the Ontario Securities Act (“OSA”) and the related legislation in other provinces.
Last month the Ontario Court of Appeal released the appeal of Justice Charney’s decision. The appellant, Tiffin, sought to appeal both the finding that he had traded securities and the custodial sentence. Ultimately, the Court of Appeal dismissed the appeal of his conviction, but overturned his sentence on the basis that the custodial term was demonstrably unfit.
The court’s review of Tiffin’s conviction was mainly devoted to principles of statutory interpretation. The court held that the scheme of the OSA is “catch and exclude”. The OSA defines key terms, such as security, broadly in order to intentionally capture a wide range of instruments and activities; the OSA then provides specific exemptions from its requirements in order to tailor its oversight. The OSA intentionally defines “security” broadly, with 16 clauses devoted to different possible broad permutations. 
Given the broad “catch and exclude” scope of the OSA, the court upheld the finding that promissory notes met the definition of security. The broad definition of security is balanced out by the large number of broad exemptions to the regulations found in the OSA. The court refused to import the US “family resemblance” test on the basis that US securities law was intentionally curtailed and restricted to the regulation of investments. The court noted that the US Securities Exchange Act of 1934, differentiates between investment instruments and commercial instruments and only regulates the former. This is evidence through the use of an exhaustive definition of a security, the inclusion of subclauses cutting down the breadth of the definition, and the specific mention of contextual analysis in the US legislation. These legislative differences gave rise to the “family resemblance” test and, according to the court, to import that test, notwithstanding the differences in Canadian legislation, would be to ignore the legislation’s deliberate choice to draft the OSA as a “catch and exclude” statute.
In this case, promissory notes fell under the broad definition of (e) “a bond, debenture, note or other evidence of indebtedness”. While normally the seller of a promissory note might be able to rely on the various statutory exemptions in order to avoid regulatory oversight of the sale, Tiffin was barred from relying on any of those exemptions due to the cease-trade order imposed upon him by the OSC. As a result, the court upheld his conviction, finding that “the promissory notes at issue in this case are securities.”
On the other hand, the court of appeal overturned the decision to impose a custodial sentence on Tiffin. The court noted that while custodial sentences are sometimes appropriate for regulatory offences, a sentence must be proportionate to the gravity of the offence and the responsibility of the offender. The court held that a contextual rather than rigid approach to sentencing was necessary to craft a sentence that achieves the overarching goals of sentencing and that the offender’s intention was a relevant consideration in crafting such a sentence.
The court conducted a contextual analysis and determined that the 6 month custodial sentence was unfit. The court paid particular attention to the fact that Tiffin had not engaged in any fraudulent conduct, he did not contest the fact that he had sold the promissory notes, he had continued to repay the notes, and that he had expressed remorse. Given these factors and the absence of any other case where a custodial sentence was imposed in a similar situation, the court set aside the 6 month custodial sentence, upholding only a 24 month probation order.
Ultimately the court’s decision reinforces that Canadian securities law intentionally captures large swathes of transactions, instruments, and activities. While normally many of these transactions, instruments, and activities will also be subject to an exemption in order to avoid regulatory scrutiny, there may be situations where these exemptions do not apply. Parties under Cease Trade Orders or whose trading capacity is otherwise restricted must be extremely wary. Even if custodial sentences don’t appear to be on the table, parties will have to take care when engaging in any commercial behaviour, lest they inadvertently end up breaching the terms of their restrictions, much like Tiffin.
 Ontario Securities Commission v Tiffin, 2020 ONCA 217 at paras 28-29.
 Ibid, at paras 40-45.
 Ibid, at para 50.
 Ibid, at paras 53-54.
 Ibid, at paras 62-64.
 Ibid, at para 67.
 Ibid, at paras 73-74.