Date: 19990112
Docket: 95-1435-IT-G
BETWEEN:
ROBERT B. FURUKAWA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on November 5, 1998, at Calgary, Alberta by the
Honourable Judge G.J. Rip
Reasons for judgment
RIP, J.T.C.C.
[1] The appellant Robert B. Furukawa appealed his assessment
for 1992 in which the Minister of National Revenue
("Minister") disallowed a deduction of $7,500 in
respect of a purported Canadian Exploration Expense
("CEE").[1] The appeal was heard on March 13, 1996 by my late
colleague Sobier, J.T.C.C. and judgment was issued on April 17,
1996 allowing the appeal. The case is reported at [1996] 2 C.T.C.
2641. Judge Sobier held that certain shares were not
"prescribed shares" under subparagraph
6202.1(2)(b)(i) of the Income Tax Regulations
("Regulations”) and therefore were flow-through
shares within the meaning of paragraph 66(15)(d.1) of the
Income Tax Act ("Act"). The Crown
appealed the judgment to the Federal Court of Appeal which, on
January 20, 1997, allowed the appeal, set aside the judgment and
referred the matter back
... to the Tax Court Judge for a continuation of the trial on
the basis that he hears and determines the issue of whether the
shares in question are "prescribed shares" under
subsection 6202.1(1) of the Regulations. ...
[2] The Court of Appeal permitted Mr. Furukawa, at his
election, to adduce any additional evidence in supplementation of
the facts agreed to prior to trial. The following are the Agreed
Statement of Facts:[2]
1. The Appellant is an individual residing at 8315 Hawkview
Manor Link, Calgary, Alberta T3G 3E6.
2. Provident Ventures Corporation ("Provident") is a
corporation incorporated in the province of Alberta and governed
by the Alberta Business Corporations Act. Provident was
listed on the Alberta Stock exchange in 1989 and ... exhibit
"A" is a list of the trading activity for the 1991
calendar year in the shares of the company. The Appellant was a
director and officer of Provident since its inception in the late
1980's but ceased to be a director on January 26, 1994.
3. Bearcat Explorations Ltd. ("Bearcat") is a
corporation incorporated in the province of Alberta and governed
by the Alberta Business Corporations Act. The Appellant
has been a director of Bearcat since the late 1980's.
4. The Appellant became a shareholder in Bearcat in the late
1980's. The Appellant's holdings in Bearcat were as
follows:
Prior to May 1990 58,500 common shares
At June 1991 75,500 common shares
At May 1992 75,500 common shares
At June 1993 75,500 common shares
At August 1994 94,374 common shares
4,350 preferred shares
At June 1995 137,874 common shares
5. Lumberton Mines Limited ("Lumberton") is a
corporation incorporated in the province of Alberta and governed
by the Alberta Business Corporations Act and has at all
material times been a subsidiary of Bearcat. The Appellant became
a director of Lumberton in the late 1980's. ... Exhibit
"B" (is) the financial statements for Lumberton's
year ended November 30, 1992 together with comparable figures for
the year ended November 30, 1991.
6. In early 1991, Lumberton prepared a "Resume"
outlining the terms of a $3,000,000 private placement financing
("the private placement financing") which offered
investors the opportunity to participate in the financing of
certain oil and gas exploration activities. Investors were
offered the opportunity to participate in the venture by
acquiring "unit interests". The particulars of the unit
participation are outlined in the Resume attached herewith as
Exhibit "C". [See Appendix to these reasons]
7. In 1991 Lumberton sold units to various subscribers
including the Appellant who purchased a one-quarter unit for
$7,500. The Appellant acquired his one-quarter unit as part of a
joint purchase together with Messrs. Zawatski, Neustater and
Maier, wherein the group jointly acquired two units which units
were held in trust by Mr. Maier.
8. ... Exhibit "D" is a photocopy of the
Appellant's cheque for $22,500 in respect of his one-quarter
unit (for $7,500) and his spouse's purchase of one unit (for
$15,000).
9. ... Exhibit "E" is a copy of the Appellant's
receipt, dated March 26, 1991, in respect of the purchase and a
second "Amended Receipt" received under cover of letter
dated February 26, 1992. [See Appendix to these reasons]
10. As part of the purchase of the units, Lumberton agreed to
issue to the Appellant "certain flow-through
shares"1 of
______________
1 The dispute between the parties is whether these
shares are in fact "flow-through shares" within the
meaning of the Income Tax Act.
Lumberton and "renounce" in favour of the Appellant
pursuant to paragraph 66(12.6) of the Income Tax Act
(Canada) (the "Act"), Canadian Exploration
Expense ("CEE") in the amount equal to the
consideration of $7,500. ... Exhibit "F" is a photocopy
of the share certificate of Lumberton issued to the Appellant and
... Exhibit "G" (is) the "flow-through share
issuance agreement".*
11. Lumberton allocated the entire purchase price from the
sale of the units to the Lumberton Shares and spent all of the
proceeds from the sale of the units in carrying out CEE and
renounced all of the CEE to the investors including the
Appellant.
12. With respect to the other items that Lumberton undertook,
in the Resume, to provide to the investors:
(a) To date, the Palmer Golf Course had not been built and
Provident has changed its business to marketing bottled
water;
(b) He relinquished his right to be assigned an interest in
the pipeline2 to Lumberton (at no cost) as part of the
share exchange outlined in paragraph 17 infra.
(c) The Appellant never received the playing privilege at the
Palmer Golf Course or the option to the lot and he relinquished
his right to receive these items to Lumberton at no cost as part
of the share exchange outlined in paragraph 17 infra.
(d) The Appellant received 125 shares of Provident on or about
August 10, 1995. ... Exhibit "H" is a copy of the cover
letter [See Appendix to the reasons] and share certificate for
Provident.
___________
2 The pipeline was a 5-mile 8-inch gas
pipeline.
13. Revenue Canada has not verified the "attributed
values" in the Resume. It is neither the Appellant's or
the Respondent's position that the "attributed
values" on the Resume are correct.
14. By way of a letter dated May 15, 1992 from Lumberton to
the Appellant, the Appellant received a cheque in the amount of
$7.81 representing a portion of the Grassy pipeline unit tariff
revenue for the months of January, February and March of 1992.
... Exhibit "I" is a copy of that letter. From time to
time the Appellant received further amounts in respect of Grassy
Hill Pipeline revenues. The total amount received by the
Appellant from the time that he acquired the Lumberton shares
until the time that he it [sic] relinquished his right to
the [sic] receive an interest in the pipeline (May 4,
1995) was slightly in excess of $125.00.
15. In 1991 and 1992 Lumberton was subject to an investigation
by the Alberta Securities Commission ("ASC") for
alleged breaches of the Securities Act/Regulations/policies
resulting from the private placement financing. The breaches in
question, which Lumberton maintained were inadvertent were as
follows:
(i) inaccurate representations made to subscribers concerning
the interests making up the private placement units which
Lumberton had not earned and/or was not in a position to deliver
at the time of the offering;
(ii) representations made to the subscribers concerning the
obtaining of a listing of Lumberton on the Alberta Stock
Exchange;
(iii) reliance for private placements on a statutory exemption
from prospectus and registration requirements which resulted in
trades to purchasers in excess of the maximum number (50)
prescribed for this exemption; and
(iv) late filing of certain forms for two private
placements.
16. The dispute between the ACS and Lumberton was settled and
as part of the settlement Lumberton was required to make an offer
of rescission to subscribers who participated in the 1991
placement and pursuant to an offer dated December 3, 1992
Lumberton offered to buy back the Appellant's shares, and ...
Exhibit "J" is a copy of that offer. The Appellant did
not accept the said offer.
17. By way of a letter dated April 25, 1994, Bearcat offered
inter alia to exchange the shares of Lumberton held by the
investors for shares of Bearcat. The Appellant accepted
Bearcat's offer and signed a Release and Discharge dated May
5, 1994, in respect of this offer. A copy of that Release and
Discharge is ... Exhibit "K".
18. By way of a letter dated July 11, 1994 the Appellant
received a share certificate for his Bearcat shares. ...
Exhibit "L" is a copy of the letter and the
Appellant's share certificate for the Bearcat shares.
19. In computing his income for the 1992 taxation year, the
Appellant claimed $7,500 as a deduction from income with respect
to CEE renounced to the Appellant by Lumberton.
20. By way of a Notice of Reassessment dated March 24, 1994,
the Minister disallowed the deduction in the amount of $7,500 for
the Appellant's 1992 taxation year in respect of CEE
renounced to the Appellant by Lumberton. ...
Exhibit "M" is a copy of the Notice of
Reassessment.
21. The Appellant filed a Notice of Objection to the
Reassessment within the time permitted by the Act and the
Minister confirmed the Reassessment on January 24, 1995. ...
Exhibit "N" is a copy of the Notice of Objection and
... Exhibit "O" is a copy of the Notice of
Confirmation.
[3] The only additional evidence adduced at the continuation
of the trial was the reading of portions of the examination for
discovery of Mr. Purdy, the Revenue Canada assessor.
[4] Counsel agree that the relevant provisions of subsection
6202.1(1) of the Regulations are subparagraphs
(b)(iii) and (iv), which read as follows:
6202.1(1) For the purposes of paragraph 66(15)(d.1) of
the Act, a new share of the capital stock of a corporation
is a prescribed share if, at the time it is issued,
...
(b) any person or partnership has, either absolutely or
contingently, an obligation (other than an excluded obligation in
relation to the share)
...
(iii) to transfer property, or
(iv) otherwise to confer a benefit by any means whatever,
including the payment of a dividend,
either immediately or in the future, that may reasonably be
considered to be, directly or indirectly, a repayment or return
by the corporation or a specified person in relation to the
corporation of all or part of the consideration for which the
share was issued or for which a partnership interest was issued
in a partnership that acquires the share;
[5] The status of the flow-through shares under section 6202
of the Regulations was discussed by Bonner, J.T.C.C. in
Esplen v. The Queen.[3] He stated, at p. 1276, that:
... 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. ...
[6] Judge Bonner's comments are in keeping with the
submission of the Minister that the purpose underlying subsection
6202.1(1) of the Regulations is to ensure that the monies
invested in flow-through shares are actually used as risk capital
in the resource industry. Prescribed shares are excluded from the
definition of flow-through shares for the purposes of paragraph
66(15)(d.1) of the Act.
[7] In order to qualify as a prescribed share pursuant to
subparagraph 6202.1(b)(iii) or (iv) of the
Regulations several requirements must be met: at the time
the shares are issued a person must have an absolute or
contingent obligation to transfer property or confer a benefit on
the taxpayer, the transfer of property or conferral of a benefit
may be immediate or may be performed in the future, and the
transfer of property or conferral of a benefit must reasonably be
considered a direct or indirect repayment or return of the
consideration paid for the shares issued.
[8] The first matter before me is to determine whether
Lumberton had an absolute or contingent obligation to transfer
property or confer a benefit upon Mr. Furukawa at the time the
Lumberton shares were issued. The Minister submitted that the
items outlined in the Resume included as Exhibit "C" to
the Agreed Statement of Facts ("Resume") represent such
obligations. At times during the trial it was not clear what unit
package the appellant acquired and, therefore, what additional
property he was to receive with the shares.[4] However, a review of the Agreed
Statement of Facts and the evidence adduced at both parts of the
trial indicate that the appellant acquired a one-quarter interest
of a single unit purchased in conjunction with a group of
investors who together purchased two units which is sometimes
referred to as a "double unit". The attachments in
issue are those associated with a double-unit purchase. This is
indicated in a letter to the appellant from Lumberton, dated
August 10, 1995, that in order to resolve an inequity between
investors who purchased one unit and those who purchased two,
Lumberton would be issuing 1,000 common shares of Provident to
investors who purchased two units. Consequently, the appellant
received a certificate for 125 Provident shares (1,000 shares/2 x
25 per cent).
[9] The Resume indicates that investors could subscribe for
one unit of 60,000 common voting shares or two-units of 120,000
common voting shares. Upon making such an acquisition, the Resume
indicates that the investor would receive additional attachments,
two lifetime playing privileges at Palmer Bar Golf Course, once
it became operational; one one-quarter acre building lot at
Palmer Bar Golf Course, once it became operational; and a 1.4 per
cent interest in Grassy Pipeline.
[10] The Resume also provides that new shareholders were to
"receive additionally at no cost out of the asset holdings
of Lumberton Mines Limited..." the attachments described
above. It therefore appears that the shareholder was acquiring an
investment in 120,000 common voting shares of Lumberton and that
the additional attachments were merely add-ons.
[11] But are the attachments an obligation? The appellant has
argued that they were not and stated that he did not receive many
of the promised items and those he did receive had little
intrinsic value. The fact that the appellant did not receive all
of these items is irrelevant to the analysis because subsection
6202.1(b) of the Regulations provides that the
person must have an obligation existing at the time the Lumberton
shares were issued. And the obligation may be absolutely or
contingent, immediate or in the future. The Resume is undoubtedly
an offer that was intended to cause investors to act in reliance
on the representations made therein. The Alberta Securities
Commission was apparently of this view since it found that
Lumberton had breached the Province's Securities legislation
and made inaccurate representations to investors. The legal
obligation created by the Resume is further supported by the
receipts issued by Lumberton, which confirms that the appellant
would receive the attachments.
[12] Appellant's counsel submitted that Mr. Furukawa did
not think he was entitled to receive the benefits outlined in the
Resume because he did not purchase a whole unit. I do not agree.
The appellant knew that he was part of a group purchasing two
units. He knew the group may receive the attachments associated
with a double unit purchase and that he would receive his
proportionate share of the attachments. Although he did not enter
the transaction for the purpose of acquiring the attachments, he
hoped to receive, if he did not reasonably expect to do so, his
share of the attachments.
[13] I do not give much weight to the appellant's argument
that he did not receive some of the attachments such as the golf
course lot or the lifetime playing privileges. These were
undoubtedly contingent upon the completion of the golf course and
hence, were intended to be conferred in the future.
Subsection 6202.1(b) of the Regulations
provides that the obligation may be contingent and that the
transfer of property or conferral of a benefit may occur in the
future. The fact that the contingent obligation was only that,
does not bring the appellant outside the application of the
regulation.
[14] Hence, in my view, there was an obligation to transfer
property to the appellant at the time the Lumberton shares were
issued. I must now decide whether this was a repayment or return
of all or part of the consideration paid by the appellant for the
shares.
[15] In his reasons for judgment, Sobier, J.T.C.C. held that
the attachments were "sweeteners", used to market the
flow-through shares. Indeed the auditor for Revenue Canada
considered them such. Appellant's counsel argued that this
conclusion foreclosed the Minister's argument that they were
a return of consideration. This is not necessarily so. Depending
on circumstances a sweetener may or may not be a return of
consideration. For example, when a manufacturer offers a rebate
to the end consumer of its product upon the consumer mailing a
coupon to the manufacturer or its agent indicating he or she
purchased the product, the manufacturer is offering a sweetener
to its potential customers to promote the product. To the
consumer the rebate is a return of a portion of the purchase
price; that is, a return of the consideration he or she paid for
the product.
[16] The parties acknowledge that the full amount invested by
Mr. Furukawa and received by Lumberton on the issuance of the
shares was a CEE. This being so, these funds could not be
returned to the shareholders. As the Minister's counsel
argued, the attachments would have to be paid for by Lumberton
out of its profits or assets and, therefore, the attachments
would constitute an indirect return of the consideration. He
submitted that it did not matter that the specific funds received
as consideration were used to make the repayment as long as the
company's assets or profits were depleted as a result of the
repayment. This is true but it is not determinative of the issue
before me given all the circumstances surrounding the issuance of
the shares and the attachments.
[17] According to paragraph 6202.1(1)(b) of the
Regulations the transfer of property or conferral of a
benefit must "reasonably" be considered a return of the
consideration paid. The term "reasonably" implies an
objective, rather than a subjective, examination of the facts.
One must ask whether a reasonable person appraised of the
circumstances would think that the attachments were a return of
the consideration paid for the shares. Although Lumberton was
legally obliged to provide these attachments, an examination of
its financial statements clearly indicates that Lumberton was not
in a position to fulfill the obligation at that time or in the
near or reasonable future. Hence, a reasonable person would
probably attach little significance in the whole scheme of things
to the attachments. Realistically, the person would have very
little expectation of getting any of the sweeteners. Further, as
Sobier, J.T.C.C. found, the benefits had little intrinsic value.
Although Judge Sobier reached his conclusion in considering
subsection 6202.1(2) of the Regulations, it is
equally applicable to the issue before me. The attachments
associated with the Lumberton shares, while they are owed to the
appellant, did not appear to influence the appellant's
decision to purchase the shares and cannot reasonably be
considered a return of the consideration of the sum of $7,500
paid for the shares. The Lumberton shares are not prescribed
shares within the definition of subparagraph
6202.1(1)(b)(iii) or (iv) of the Regulations. The
appeal is allowed with costs.
[18] During the continuation of the appeal, appellant's
counsel submitted that the Deputy Attorney General did not allege
in the Reply to the Notice of Appeal that in reassessing the
appellant the Minister assumed that the property transferred or
benefit conferred was a repayment or return to the appellant of
the consideration he paid for the Lumberton shares. The reason
for this omission, he concluded, was because the Minister did not
make that assumption. The Minister did not assess the appellant
on the basis that the transfer of the property or the conferral
of the benefit was a repayment or return of the consideration.
This was the conclusion of Sobier, J.T.C.C. The assessment before
the Court, counsel stated, was clearly based on the premise that
the mere transfer of property or the conferral of the benefit
makes shares prescribed shares and that the property or benefit
was a marketing feature.
[19] Counsel referred to the recent decision of the Supreme
Court of Canada in Continental Bank of Canada v. Canada,
[1998] 2113 E.T.C. which held that the Deputy Attorney General
was not entitled to assert an alternative basis to sustain an
assessment being litigated. As McLachlin, J., declared:
The Minister should not be allowed to advance a new basis for
reassessment after the limitation period [subsection 152(4)] has
expired.
(See also Bastarache, J.'s opinion shared by McLachlin,
J.)
[20] Appellant's counsel, therefore, asked me to ignore
the claim by the Deputy Attorney General that the transfer of
property or conferral of the benefit was a repayment or return of
the consideration since that was not the basis of the assessment.
Since I have considered the issue as directed by the Federal
Court of Appeal and since the appellant is successful, it is not
necessary at this time to consider counsel's submission with
respect to Continental Bank, supra. I am satisfied that I
could give, and have given, effect to the direction of the
Federal Court of Appeal.[5] There is no need to call any new evidence to decide
whether the Minister relied on subsection 6202.1(1) of the
Regulations as the basis of the assessment.
Signed at Ottawa, Canada, this 12th of January 1999.
"G.J. Rip"
J.T.C.C.
Appendix to Reasons for Judgment
[Omitted]
Email this Content