Furukawa v. R., [1996] 2 CTC 2641

Sobier J.T.C.C.: — The Appellant appeals from the assessment by the Minister of National Revenue (the “Minister”), whereby the Minister disallowed the deduction in the amount of $7,500.00 for the Appellant’s 1992 taxation year in respect of Canadian Exploration Expense (CEE). The following is an agreed statement of facts filed by the parties to this appeal:

The parties by their respective solicitors and for the purpose of this appeal only, hereby admit the following facts provided that such admissions are made for the purpose of this appeal only and may not be used against either party on any other occasion or by any other party:

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 attached herewith as exhibit “A” [1] 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	137,974 common shares
	250 preferred 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. Attached herewith as Exhibit “B” are 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”.

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. Attached herewith as 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. Attached herewith as 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.

10. As part of the purchase of the units, Lumberton agreed to issue to the Appellant “certain flow-through shares” of Lumberton and “renounce” in favour of the Appellant pursuant to paragraph 66(12.6) of the Income Tax Act (the “Act”), Canadian Exploration Expense (“CEE”) in the amount equal to the consideration of $7,500. Attached herewith as Exhibit “F” is a photocopy of the share certificate of Lumberton issued to the Appellant and as Exhibit “G” 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 build and Provident has changed its business to marketing bottled water; [2]

(b) He relinquished his right to be assigned an interest in the pipeline 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. Attached herewith as Exhibit “H” is a copy of the cover letter and share certificate for Provident.

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. Attached herewith as Exhibit “I” is a copy of the 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 relinquished his right to receive an interest in the pipeline (May 4, 1995) was slightly in excess of $125.

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 ASC 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 attached herewith as 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 attached herewith as Exhibit “K”.

18. By way of a letter dated July 11, 1994, the Appellant received a share certificate for his Bearcat shares. Attached herewith as Exhibit “L” is a copy of the latter 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. Attached herewith as 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. Attached herewith as Exhibit “N” is a copy of the Notice of Objection and as Exhibit “O” is a copy of the Notice of Confirmation.

The scheme of the Act in providing for flow-through shares is to permit an investor to invest in an exploration company which uses the proceeds of the investment to incur CEE and then renounces the CEE to the investor who is deemed to have made the CEE himself at the date of the renunciation. [3]

The Appellant claims that all of the requirements of the applicable provisions had been complied with and the Lumberton Shares were flow- through shares in the meaning of subsection 66(12.6) and 66(15) and were not prescribed shares within the meaning of subparagraphs 6202.1 to (b)(iii) and (iv) of the Income Tax Regulations (the “Applicable Regulations”).

The Appellant further argues that Lumberton properly renounced the CEE of $7,500 to the Appellant and as a result, he became entitled to claim the CEE. The Respondent maintains that the requirements have not been met and that the Lumberton Shares are not flow- through shares because they are prescribed shares within the meaning of the Applicable Regulations. The Applicable Regulations read as follows:

(2) For the purposes of paragraph 66(15)(d.I) [4] of the Act, a new share of the capital stock of a corporation is a prescribed share if...

(b) the corporation or a specified person in relation to the corporation, directly or indirectly,

(i) provided assistance,

(ii) made or arranged for a loan or payment,

(iii) transferred property, or

(iv) otherwise conferred a benefit by any means whatever, including the payment of a dividend,

for the purpose of assisting any person or partnership in acquiring the share or any person or partnership in acquiring an interest in a partnership acquiring the share (otherwise than by reason of an excluded obligation in relation to the share);

Simply stated, the issue is whether the Lumberton Shares were not flow-through shares because they were prescribed shares.

The Respondent maintains that the Lumberton Shares are prescribed shares within the meaning of the Applicable Regulations because the package of benefits given to the Appellant as outlined in the Resume [5] were given for the purpose of assisting the Appellant in acquiring the Lumberton Shares.

On examination for discovery of Mr. Purdy, the Revenue Canada asses- sor involved, correspondence was produced which indicated that the Minister took the position that the Lumberton Shares were prescribed shares pursuant to the Applicable Regulations. The correspondence went on to say that they were considered prescribed shares because of the four benefits set forth in the Resume and it was on this basis that the determination was made that they were prescribed shares.

It is obvious that the intrinsic value of some of these benefits was very little at the time that the Lumberton Shares were purchased. At best, they are benefits which would arise in the future, if at all. Lifetime golf playing privileges, as well as the option to purchase a one-quarter acre building lot at the golf course were both future considerations, both of which never in fact materialized. The Appellant received approximately $125 in cash from the Grassy Pipeline commencing in 1992. Of the 5,000 shares of Provident Ventures Corporation which were promised in 1992, the Appellant received only 125 shares and those he received in 1995.

In order for the Lumberton Shares to be prescribed shares, they must be made so under the Applicable Regulations. To ascribe a meaning to the words “for the purpose of assisting” over and above the plain meaning of those words would be necessary in order to render the Lumberton Shares prescribed shares. The word “assist” or “assisting” denotes help, aid, or support. In other words, the issuer must in some way aid, help or support the purchaser so that if such assistance, aid, help or support was not forthcoming, the purchaser would be unable to complete the acquisition. This was not the case. Cash was paid for the unit. There was no assistance in providing this cash such as a loan or guarantee.

Nothing in the package of marketing incentives would in any way qualify as assistance. They were more akin to what is known in the securities industry and described by Appellant’s counsel as a “sweetener”. The “sweeteners” could not be said to have helped Mr. Furukawa in purchasing the Lumberton shares. In addition, he alone could not have received the “sweeteners” because he did not purchase one whole unit. The benefits contained in the Resume could not be said to have assisted the Appellant in purchasing the Lumberton Shares.

I do not believe that to interpret the words “for the purpose of assisting any person ... in acquiring the shares ...” one has to delve into the intricacies of cases such as Stubart Investments Ltd. v. R., [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305 or Quebec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3, (sub nom. Notre- Dame de Bon-Secours (Corp.) v. Québec (Communauté urbaine)), [1995] 1 C.T.C. 241, (sub nom. Corp. Notre-Dame de Bon Secours v. Québec (Communauté urbaine)), 95 D.T.C. 5017. The plain meaning of those words is clear.

All of the requirements of the Act necessary to qualify the Lumberton Shares as flow-through shares have been met and the provisions of the Applicable Regulations do not render them prescribed shares.

Therefore, the appeal is allowed and the matter referred back to the Minister for reconsideration and reassessment in accordance with these reasons.

In accordance with the order of Associate Chief Judge Christie dated October 16, 1995, all reasonable and proper costs of the Appellant shall be borne by Her Majesty the Queen in Right of Canada.

Appeal was allowed.