Bonner
J.T.C.C.:—
This
is
an
appeal
from
an
assessment
of
income
tax
for
the
1986
taxation
year.
During
that
year
the
appellant
subscribed
for
and
purchased
2,062
common
shares
and
2,062
common
share
purchase
warrants
of
Borealis
Exploration
Limited
(“Borealis’’).
It
is
the
appellant’s
position
that
the
shares
acquired
were
“flow-through
shares”
as
defined
in
paragraph
66(15)(d.l)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(“the
Act”),
that
Borealis
incurred
Canadian
exploration
expenses
(“CEE”)
which
it
renounced
to
him
under
subsection
66(12.6)
of
the
Act
and
that
the
CEE
was
deemed
to
have
been
incurred
by
him
by
virtue
of
subsection
66(12.61)
of
the
Act.
On
assessment
the
Minister
of
National
Revenue
(“Minister”)
disallowed
a
deduction
claimed
by
the
appellant
under
subsection
66.1(3)
of
the
Act.
The
issues
were:
1.
Whether
the
shares
in
question
were
“prescribed
shares”
under
paragraph
6202(1
)(b)
of
the
Income
Tax
Regulations
and
were
therefore
excluded
from
the
paragraph
66(15)(d.l)
definition;
and
2.
whether
any
of
the
expenses
which
Borealis
purported
to
renounce
to
the
appellant
were
unavailable
for
renunciation
to
the
appellant
either
because
some
of
them
were
not
incurred
by
Borealis
or
because
they
had
previously
been
renounced
by
it
to
third
parties.
The
statutory
provisions
of
immediate
relevance
are:
(a)
Paragraph
66(15)(d.l)
which
defines
the
term
“flow-through
share”
as
follows:
66(15)
In
this
section
and
sections
66.1,
66.2
and
66.4,
(d.
1
)
“flow-through
share”
means
a
share
(other
than
a
prescribed
share)
of
the
capital
stock
of
a
principal-business
corporation
that
is
issued
to
a
person
pursuant
to
an
agreement
in
writing
entered
into
between
the
person
and
the
corporation
after
February
1986,
under
which
the
corporation
agrees
(i)
to
incur,
during
the
period
commencing
on
the
day
the
agreement
was
entered
into
and
ending
24
months
after
the
end
of
the
month
that
includes
that
day,
Canadian
exploration
expenses,
Canadian
development
expenses
or
Canadian
oil
and
gas
property
expenses
in
an
amount
not
less
than
the
consideration
for
which
the
share
is
to
be
issued,
and
(ii)
to
renounce,
within
that
period
or
within
30
days
thereafter,
in
prescribed
form
to
the
person
in
respect
of
the
share,
an
amount
in
respect
of
the
Canadian
exploration
expenses,
Canadian
development
expenses
or
Canadian
oil
and
gas
property
expenses
so
incurred
by
it
not
exceeding
the
consideration
received
by
the
corporation
for
the
share,
and
includes
a
right
of
a
person
to
have
such
a
share
issued
to
him
and
any
interest
acquired
in
such
a
share
by
a
person
pursuant
to
such
an
agreement;
(b)
subsection
66(12.6)
which
permits
renunciation
of
CEE
and
reads
as
follows:
(12.6)
Where
a
person
has
given
consideration
under
an
agreement
to
a
corporation
for
the
issue
of
a
flow-through
share
of
the
corporation
and,
during
the
period
commencing
on
the
day
the
agreement
was
entered
into
and
ending
24
months
after
the
end
of
the
month
that
included
that
day,
the
corporation
has
incurred
Canadian
exploration
expenses,
the
corporation
may,
after
it
has
complied
with
subsection
(12.68)
in
respect
of
the
share
and
within
that
period
or
within
30
days
thereafter,
renounce,
effective
on
the
date
on
which
the
renunciation
is
made
or
on
such
earlier
date
as
may
be
set
out
in
the
form
prescribed
for
the
purposes
of
subsection
(12.7),
to
the
person
in
respect
of
the
share
the
amount,
if
any,
by
which
those
expenses
incurred
by
it
during
that
period
and
on
or
before
the
effective
date
of
the
renunciation
exceed
the
aggregate
of
(c)
subsection
66(12.61)
which
deems
CEE
which
has
been
renounced
to
be
CEE
incurred
by
the
person
to
whom
it
was
renounced
and
no
one
else:
(12.61)
Where
a
corporation
renounces
an
amount
to
a
person
under
subsection
(12.6),
(a)
the
Canadian
exploration
expenses
to
which
the
amount
relates
shall
be
deemed
to
be
Canadian
exploration
expenses
incurred
in
that
amount
by
the
person
on
the
effective
date
of
the
renunciation;
and
(b)
the
Canadian
exploration
expenses
to
which
the
amount
relates
shall,
except
for
the
purpose
of
that
renunciation,
be
deemed
on
and
after
the
effective
date
of
the
renunciation
never
to
have
been
Canadian
exploration
expenses
incurred
by
the
corporation.
(d)
subsection
66(12.66)
which
deems
expenses
incurred
within
60
days
after
the
end
of
1986
to
have
been
incurred
on
the
effective
date
of
the
renunciation,
in
this
case
December
31,
1986:
(12.66)
Where
(a)
a
corporation
that
issues
a
flow-through
share
to
a
person
under
an
agreement
incurs,
within
60
days
after
the
end
of
a
calendar
year,
Canadian
exploration
expenses,
(b)
the
Canadian
exploration
expenses
are
expenses
described
in
subparagraph
66.1
(6)(a)(iii)
incurred
in
respect
of
a
mineral
resource
other
than
a
bituminous
sands
deposit,
an
oil
sands
deposit
or
an
oil
shale
deposit,
(c)
before
the
end
of
the
year,
the
agreement
was
entered
into
between
the
corporation
and
the
person
and
the
person
paid
the
consideration
for
the
share
in
money,
(d)
the
corporation
and
the
person
deal
with
each
other
at
arm’s
length
throughout
the
60
days,
and
(e)
within
90
days
after
the
end
of
the
year
the
corporation
renounces
an
amount
in
respect
of
the
Canadian
exploration
expenses
to
the
person
in
respect
of
the
share
in
accordance
with
subsection
(12.6)
and
the
effective
date
of
the
renunciation
is
the
last
day
of
the
year,
the
corporation
shall
for
purposes
of
subsection
(12.6)
be
deemed
to
have
incurred
the
expenses
on
the
effective
date
of
the
renunciation.
The
question
whether
the
shares
issued
to
the
appellant
are
prescribed
shares
and
therefore
excluded
from
the
paragraph
66(
15)(d.l
)
definition
of
“flow-through
share”
turns
on
paragraph
6202(1
)(b)
of
the
Income
Tax
Regulations
and
on
the
arrangements
under
which
the
shares
were
issued
to
the
appellant.
It
was
the
position
of
the
respondent
that
Borealis
provided
a
“form
of
guarantee,
security
or
similar
indemnity
with
respect
to
the
share(s)...
thus
bringing
the
shares
within
paragraph
6202(1)(b).
The
position
of
the
appellant
was
that
the
arrangement
relied
on
by
the
respondent
was
a
loan
arrangement,
and
nothing
more.
Section
6202
provides
in
part:
6202(1)
For
the
purposes
of
paragraph
66(15)(d.
1)
and
subparagraphs
66.1(6)(a)(v),
66.2(5)(a)(v)
and
66.4(5)(a)(iii)
of
the
Act,
a
share
of
a
class
of
the
capital
stock
of
a
corporation
(in
this
section
referred
to
as
the
“issuing
corporation’’)
is
a
prescribed
share
if
it
was
issued
after
December
31,
1982
and
(a)
the
issuing
corporation,
any
person
related
to
the
issuing
corporation
or
of
whom
the
issuing
corporation
has
effective
management
or
control
or
any
partnership
or
trust
of
which
the
issuing
corporation
or
a
person
related
thereto
is
a
member
or
beneficiary
(each
of
which
is
referred
to
in
this
section
as
a
“member
of
the
related
issuing
group”)
is
or
may
be
required
to
redeem,
acquire
or
cancel,
in
whole
or
in
part,
the
share
or
to
reduce
its
paid-up
capital
at
any
time
within
five
years
from
the
date
of
its
issue,
(b)
a
member
of
the
related
issuing
group
provides
or
may
be
required
to
provide
any
form
of
guarantee,
security
or
similar
indemnity
with
respect
to
the
share
(other
than
a
guarantee,
security
or
similar
indemnity
with
respect
to
any
amount
of
assistance
or
benefit
from
a
government,
municipality
or
other
public
authority.
in
Canada
or
with
respect
to
eligibility
for
such
assistance
or
benefit)
that
could
take
effect
within
five
years
from
the
date
of
its
issue....
The
subscription
agreement
between
the
appellant
and
Borealis
made
“as
of”
December
30,
1986
named
a
subscription
price
of
$360,000.
At
the
same
time
an
arrangement
was
made
for
a
loan
of
$160,000
by
Borealis
to
the
appellant.
The
relevant
provisions
of
the
subscription
agreement
are:
2.1
Subscription
The
subscriber
subscribes
for
the
purchase
of
two
units
at
$180,000
per
unit
for
a
total
subscription
price
of
$360,000.
The
purchase
price
per
unit
shall
be
allocated
between
the
common
shares
and
the
warrants
comprising
each
unit
at
$100,000
and
$80,000,
respectively.
2.2
Payment
of
Subscription
Price
The
subscriber
encloses
with
this
agreement
a
cheque
in
the
amount
of
$360,000
drawn
on
the
trust
account
of
the
subscriber’s
solicitors,
Woolley,
Dale
&
Dingwall,
and
made
payable
to
the
Trustee.
2.3
Escrow
The
parties
hereto
acknowledge
that
the
payment
made
pursuant
to
section
2.2,
less
the
$160,000
loan
provided
in
the
loan
agreement
and
the
legal
fee
of
$10,000
provided
for
in
section
8.1,
shall
be
held
in
escrow
by
the
trustee
until
the
company
has
satisfied
all
conditions
of
subscription
set
out
in
Article
VI.
If
such
conditions
have
not
been
satisfied
to
the
satisfaction
of
the
subscriber
and
his
counsel
by
the
close
of
business
(Calgary
time)
on
January
16,
1987,
the
company
shall
forthwith
direct
the
trustee
to
forward
the
subscription
funds,
less
the
$160,000
loan
provided
in
the
loan
agreement,
to
Woolley,
Dale
&
Dingwall.
The
company
agrees
to
pay
$10,000
into
the
escrow
account
of
the
trustee
in
such
event
to
permit
the
trustee
to
be
in
funds
to
make
the
payment
in
full.
3.1
Subscription
Proceeds
The
company
shall
during
the
period
commencing
the
date
hereof
and
ending
on
the
expenditure
date
expend
an
amount
equal
to
the
amount
of
the
subscription
funds
on
expenditures
which
qualify
as
Canadian
exploration
expense.
3.2
Renunciation
On
or
before
March
30,
1987,
the
company
shall
renounce
to
the
subscriber,
effective
December
31,
1986,
not
less
than
$324,000,
which
amount
represents
90
per
cent
of
the
subscription
funds,
on
Canadian
exploration
expense,
which
expense
shall
qualify
for
the
mining
exploration
depletion
deduction
under
the
tax
Act,
incurred
by
the
company
prior
to
the
expenditure
date.
Such
renunciation
shall
be
made
in
accordance
with
the
provisions
of
the
tax
Act,
particularly
subsection
66(12.66)
thereof,
and,
accordingly,
the
company
shall
file
the
prescribed
form
in
respect
of
such
renunciation
with
the
Minister
by
no
later
than
April
30,
1987
and
provide
a
copy
of
such
filing
to
counsel
for
the
subscriber.
ARTICLE
VI
CONDITIONS
OF
SUBSCRIPTION
6.1
Delivery
of
Certificates
On
or
before
January
16,
1987,
the
company
shall
issue
and
deliver
to
the
subscriber
certificates
representing
the
common
shares
and
warrants
comprising
the
units
purchased
hereunder.
Pursuant
to
the
provisions
of
the
loan
agreement,
the
subscriber
directs
the
company
to
deliver
the
certificate
representing
the
warrants
purchased
hereunder
and
a
certificate
representing
412
of
the
common
shares
purchased
hereunder
to
the
trustee.
6.2
Confirmation
of
Exploration
Program
On
or
before
January
16,
1987,
the
company
shall
deliver
to
the
subscriber,
in
form
satisfactory
to
counsel
for
the
subscriber,
a
letter
from
a
qualified
geologist
who
is
familiar
with
the
properties
on
which
the
company
plans
to
incur
the
Canadian
exploration
expense
described
hereunder,
certifying
that
a
valid
exploration
program
is
in
place
for
the
expenditure
of
an
amount
equal
to
the
entire
subscription
funds
on
expenditures
which
qualify
as
Canadian
exploration
expense
and
providing
a
budget
for
such
expenditure.
It
may
be
noted
that
in
effect
paragraph
2.3
provides
for
the
funding
of
the
loan
by
diversion
of
$160,000
of
the
subscription
price.
The
loan
agreement
has
some
remarkable
features.
The
loan
is
non-
interest-bearing
and
the
lender’s
rights
of
recourse
against
the
borrower
are
severely
limited.
Liability
to
repay
is
contingent
on
the
market
value
of
the
shares
of
the
lender.
Some
relevant
terms
of
the
loan
agreement
are:
LOAN
AGREEMENT
TO:
C.
STEWART
ESPLEN,
the
subscriber
named
in
the
subscription
agreement
(the
“subscription
agreement”)
dated
the
date
hereof
between
Borealis
Exploration
Ltd.
(the
“company”)
and
such
subscriber.
We
confirm
that
we
are
prepared
to
grant
a
loan
to
you
on
the
terms
and
conditions
set
forth
below.
This
loan
agreement
forms
part
of
the
subscription
agreement.
1.
Loan
Amount:
$160,000
2.
Interest
Rate:
interest
free
3.
Term:
maximum
term
to
June
1,
1993
(see
Repayment)
4.
Trustee:
David
M.
Goldenberg,
barrister
and
solicitor,
of
the
city
of
Calgary,
Province
of
Alberta
5.
Security:
Certificate
representing
2,062
warrants
(as
defined
in
the
subscription
agreement)
and
a
certificate
representing
412
common
shares
of
the
company,
duly
endorsed
by
you
in
blank
for
transfer,
which
certificates
shall
be
delivered
to
the
Trustee
by
no
later
than
January
16,
1987....
6.
Repayment:
(a)
In
the
event
that
common
shares
of
the
company
trade
on
The
Alberta
Stock
Exchange
at
a
price
of
or
in
excess
of
$116
for
30
consecutive
trading
days
within
the
period
commencing
January
1,
1988
and
ending
June
1,
1993,
you
shall
be
required
to
exercise
the
warrants
held
as
security
hereunder
within
90
days
and
this
loan
shall
become
due
and
payable
on
or
before
the
date
which
is
10
trading
days
following
such
exercise.
(b)
If
the
event
described
in
(a)
above
does
not
occur
by
June
1,
1993,
this
loan
shall
be
deemed
to
be
satisfied
and
paid
in
full....
7.
Disbursement
of
Funds:
Upon
execution
of
this
agreement,
the
Trustee
shall
issue
a
cheque
to
your
solicitors,
Woolley,
Dale
&
Dingwall,
in
trust,
in
the
amount
of
$160,000.
9.
Further
Conditions:
(a)
...
(b)
In
the
event
that
we
have
not
satisfied
all
of
the
conditions
of
subscription
set
out
in
Article
VI
of
the
subscription
agreement,
(i)
we
shall
return
the
promissory
note
to
you
forthwith,
(ii)
you
shall
retain
the
loan
proceeds
since
this
amount
represents
part
of
the
subscription
funds
provided
by
you
under
the
subscription
agreement,
and
(iii)
this
loan
agreement
shall
be
terminated.
(d)
Other
than
with
respect
to
the
common
shares
and
warrants
pledged
hereunder,
we
shall
have
no
recourse
to
you
under
this
loan
agreement.
Paragraphs
6
and
9
of
the
loan
agreement
are
of
critical
importance
for
it
is
the
combined
effect
of
those
provisions
which,
according
to
the
respondent,
constituted
“...any
form
of
guarantee,
security
or
similar
indemnity
with
respect
to
the
share...”
within
the
meaning
of
paragraph
6202(l)(b).
Evidence
was
given
by
William
Perks
the
solicitor
who
acted
for
the
appellant
in
the
transaction.
He
testified
that
the
$160,000
loan
was
received
by
his
firm
on
behalf
of
the
appellant
and
that
the
money,
less
legal
fees,
was
then
paid
to
the
appellant.
He
added
that
the
appellant
has
never
had
to
repay
the
$160,000
to
Borealis.
The
price
of
the
common
shares
did
not
reach
the
$116
level
named
in
paragraph
6
of
the
loan
agreement.
The
price,
which
Mr.
Perks
said
had
never
previously
exceeded
$47
per
share,
fell
steeply
shortly
after
the
agreements
between
the
appellant
and
Borealis
were
formed.
I
will
deal
first
with
the
status
of
the
Borealis
shares
under
section
6202
of
the
Income
Tax
Regulations.
The
statutory
provisions
now
in
question
were
enacted
with
a
view
to
encouraging
investment
in
the
exploration
and
development
of
mineral
resources.
The
statutory
scheme
permits
an
investor
to
subscribe
for
flow-through
shares
of
a
corporation.
It
was
intended
that
the
subscription
funds
be
used
by
the
corporation
for
exploration,
that
the
corporation’s
exploration
expenses
be
renounced
to
the
investor
and
that
the
exploration
expenses
be
treated
for
purposes
of
the
Act
as
the
expenses
of
the
investor.
Plainly
the
objective
of
the
scheme
would
not
be
attained
if
the
subscription
price
were
diverted
from
exploration
and
used
to
make
provision
for
some
sort
of
arrangement
designed
to
permit
the
investor
to
recover
some
or
all
of
his
money
in
the
event
that
the
financial
performance
of
the
share
was
disappointing.
That,
as
I
see
it,
is
the
purpose
underlying
section
6202
and
that
purpose
must
be
kept
in
mind
in
constru-
ing
the
language
of
that
provision
(Québec
(Communauté
urbaine)
v.
Corp.
Notre-Dame
de
Bonsecours
(sub
nom.
Notre-Dame
de
Bon
Secours
(Corp.)
v.
Quebec
(Communauté
Urbaine)),
[1995]
1
C.T.C.
241,
95
D.T.C.
5017
(S.C.C.))
and
in
particular
the
words
“...any
form
of
guarantee,
security
or
similar
indemnity
with
respect
of
the
share....”
Paragraphs
6
and
9
of
the
loan
agreement
are
clear.
Borealis
had
no
right
to
look
to
the
appellant
for
repayment
of
the
$160,000
loan
unless
and
until
the
price
of
the
shares
reached
the
$116
level
and
remained
at
or
above
that
level
for
30
days.
There
was
no
suggestion
whatever
that
the
loan
arrangement
was
some
kind
of
colourable
device
intended
to
conceal
an
overstatement
of
the
purchase
price.
The
nature
of
the
arrangement
for
the
extinguishment
of
the
appellant’s
liability
to
repay
the
loan
was
not
a
guarantee.
Borealis
did
not
undertake
liability
in
the
event
of
the
default
of
some
third
person
primarily
liable
to
the
appellant.
The
nature
of
contracts
of
guarantee
and
indemnity
was
considered
in
R.
v.
Roynat
Ltd.,
[1981]
C.T.C.
93,
81
D.T.C.
5072
(F.C.T.D.).
At
page
101
(D.T.C.
5077-78),
Addy
J.
adopted
the
distinction
between
guarantees
and
indemnities
found
in
the
following
passages
from
Halsbury’s
Laws
of
England
(Fourth
Edition,
Volume
20,
pages
49
and
54
respectively):
101.
Guarantee.
A
guarantee
is
an
accessory
contract
by
which
the
promisor
undertakes
to
be
answerable
to
the
promisee
for
the
debt,
default
or
miscarriage
of
another
person
whose
primary
liability
to
the
promisee
must
exist
or
be
contemplated.
As
in
the
case
of
any
other
contract
its
validity
depends
upon
the
mutual
assent
of
the
parties
to
it,
their
capacity
to
contract;
and
consideration,
actual
or
implied.
108.
Guarantee
and
indemnity.
Although
a
contract
of
guarantee
may
be
described
as
a
contract
of
indemnity
in
the
widest
sense
of
the
term,
yet
contracts
of
guarantee
are
distinguished
from
contracts
of
indemnity
ordinarily
so
called
by
the
fact
that
a
guarantee
is
a
collateral
contract
to
answer
for
the
default
of
another
person,
and
thus
is
a
contract
that
is
ancillary
or
subsidiary
to
another
contract,
whereas
an
indemnity
is
a
contract
by
which
the
promisor
undertakes
an
original
and
independent
obligation.
It
is
apparent
from
the
loan
agreement
that
the
parties
agreed
that
Borealis
ought
to
compensate
the
appellant
if
the
value
of
the
shares
failed
to
reach
the
predetermined
$116
level
and
that
compensation
for
such
failure
was
to
be
the
eradication
of
the
obligation
to
repay.
As
I
see
it
by
that
agreement
Borealis
was
required
to
provide
a
form
of
security
with
respect
to
the
shares
within
the
meaning
of
section
6202.
The
security
was
the
receivable
which
Borealis
was
to
forfeit
if
the
share
price
did
not
rise
sufficiently.
The
shares
are
therefore
prescribed
shares
and
the
appeal
must
fail.
Because
of
the
possibility
that
this
matter
may
go
to
appeal,
I
will
deal
with
the
question
how
much
CEE
was
incurred
by
Borealis
and
was
properly
renounced
by
it
to
the
appellant.
A
statement
of
agreed
facts
signed
by
counsel
for
the
parties
was
filed
at
the
hearing
of
the
appeal.
That
agreement
reads:
1.
The
amount
of
cumulative
exploration
expenses
(as
defined
in
paragraph
66.1(6)(a)
of
the
Income
Tax
Act
(Canada)
(“C.E.E.”)
that
were
incurred
by
Borealis
between
January
1,
1987
and
March
1,
1987
and
renounced
by
Borealis
in
favour
of
the
apellant
was
not
less
than
$150,671
consisting
of
the
following:
(a)
Fuel
expenses
paid
by
Borealis
during
the
period
equal
to
$110,156,
in
the
aggregate;
and
(b)
Miscellaneous
expenses
paid
by
Borealis
to
arm’s
length
third
parties
equal
to
$40,515.
2.
In
addition
to
the
amounts
described
in
section
2
hereof,
Borealis
incurred
at
least
the
following
expenses
between
January
1,
1987
and
March
1,
1987;
(a)
Additional
miscellaneous
expenses
paid
by
Borealis
to
arm’s
length
third
parties
in
the
amount
of
$4,290;
and
(b)
Payroll
salaries
for
the
period
in
the
amount
of
$46,839.
3.
The
parties
agree
that
the
amounts
described
in
subsection
2(a)
and
2(b)
hereof
are
qualifying
C.E.E.,
but
do
not
agree
that
the
amounts
were
renounced
by
Borealis
in
favour
of
the
appellant.
It
is
the
respondent’s
position
that
these
amounts
were
renounced
to
another
flow-through
share
investor.
Rodney
Thomas
Cox
who
was
president
of
Borealis
at
the
relevant
time
was
called
by
the
appellant
to
testify
with
respect
to
the
question
whether
Borealis
incurred
and
renounced
to
the
appellant
any
CEE
beyond
what
was
admitted.
Mr.
Cox
was
a
most
unimpressive
witness.
His
testimony
consisted
of
vague
general
assertions
both
concerning
what
was
incurred
and
what
was
renounced.
Mr.
Cox
failed
to
produce
any
corporate
record
or
document
which
would
support
a
conclusion
that
his
unaided
recollection
was
accurate.
The
evidence
therefore
failed
to
establish
on
the
balance
of
probabilities
that
CEE
was
incurred
and
renounced
to
the
appellant
beyond
that
admitted
in
the
agreement.
The
appeal
will
be
dismissed
with
costs.
Appeal
dismissed.
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