Teskey,
T.C.J.:—This
is
an
appeal
by
Union
Carbide
Canada
Limited
with
respect
to
the
assessment
of
tax
for
its
1978
taxation
year.
The
issue
is
whether
the
appellant
must
include
in
computing
its
income
for
its
1978
taxation
year
the
sum
of
$3,090,900
as
an
amount
received
by
it
in
that
year
from
Petrosar
Limited
("Petrosar")
as,
on
account
or
in
satisfaction
of
interest
on
debentures
held
by
it,
pursuant
to
paragraph
12(1)(c)
of
the
Income
Tax
Act.
That
paragraph
as
applicable
in
1978
reads
as
follows:
12.(1)
There
shall
be
included
in
computing
the
income
of
a
taxpayer
for
a
taxation
year
as
income
from
a
business
or
property
such
of
the
following
amounts
as
are
applicable:
(c)
any
amount
received
by
the
taxpayer
in
the
year
or
receivable
by
him
in
the
year
(depending
upon
the
method
regularly
followed
by
the
taxpayer
in
computing
his
profit)
as,
on
account
or
in
lieu
of
payment
of,
or
in
satisfaction
of,
interest;
.
.
.
Basically
the
relevant
facts
have
been
agreed
upon
in
that
paragraphs
1,2,
3,
4,
8,
9
and
11
of
the
appellant's
final
amended
notice
of
appeal
dated
January
12,
1989,
are
admitted.
All
the
following
facts
were
agreed
upon
and
found
in
the
amended
notice
of
appeal
dated
December
19,
1988
and
in
the
amended
reply
to
notice
of
appeal
dated
January
10,
1989.
The
facts
in
the
amended
reply
to
notice
of
appeal,
in
paragraph
2,
and
in
subparagraphs
(b),
(c)
and
(e)
of
paragraph
5
have
been
admitted
by
the
appellant.
These
admitted
facts
are
as
follows:
Further
Amended
Notice
of
Appeal
1.
The
appellant
was
incorporated
pursuant
to
the
laws
of
Canada.
At
the
relevant
time
it
carried
on
a
variety
of
businesses,
including
the
production
of
plastics,
chemicals,
gases
and
metals.
2.
In
1974,
in
order
to
ensure
an
adequate
supply
of
petrochemical
feedstocks
for
use
in
its
manufacturing
operations,
the
appellant
and
other
parties
caused
a
company,
Petrosar
Limited
("Petrosar"),
to
be
incorporated
pursuant
to
the
laws
of
Ontario.
Petrosar
owns
and
operates
a
petrochemical
manufacturing
facility.
3.
At
the
relevant
time,
the
appellant
held
600,000
common
shares
of
Petrosar,
representing
20%
of
the
issued
common
shares.
4.
In
addition,
the
appellant
held
Petrosar
subordinated
debentures
representing
about
20%
of
all
such
debentures
issued
by
Petrosar.
These
debentures
were
unsecured
obligations
of
Petrosar,
subordinated
to
various
bank
loans
made
to
Petrosar
and
bore
interest
at
2%
over
prime.
As
of
December
31,
1977,
the
total
principal
outstanding
on
the
Petrosar
debentures
held
by
the
appellant
was
$25,122,600,
in
respect
of
which
no
interest
had
been
paid.
8.
The
terms
and
conditions
attached
to
the
A,
B
and
C
shares
may
be
described
in
the
following
manner:
A
Shares.
These
shares
rank
first
with
respect
to
dividends
and
a
portion
of
them
are
redeemable
from
1979
to
1987,
at
which
point
all
of
the
4.45
million
shares
issued
for
a
par
value
of
$100
each
will
be
redeemed.
The
dividend
rate
on
the
A
Shares
is
equal
to
52%
of
the
Canadian
bank
prime
plus
1.21%,
payable
quarterly.
In
addition,
the
holders
of
A
Shares
have
a
right
to
"put"
the
A
Shares
to
the
common
shareholders
if
Petrosar
fails
to
meet
the
redemption
obligations
on
the
A
Shares.
B
Shares.
These
shares
rank
second
with
respect
to
aggregate
dividends
of
$100
per
share,
in
priority
to
C
Shares
and
common
shares.
The
B
Shares
were
issued
for
a
par
value
of
$1.00
and
$99.00
of
contributed
surplus.
After
payment
of
dividends
totalling
$100
in
respect
of
each
B
Share,
the
B
Shares
are
redeemable
at
a
redemption
price
of
$1.00
per
share.
No
redemption
is
to
occur
unless
all
accrued
dividends
on
the
A
Shares
have
been
paid
in
full,
all
redemption
obligations
on
the
A
Shares
have
been
met,
and
after
redemption
of
the
B
Shares,
there
is
sufficient
working
capital
of
at
least
$10,000,000
plus
an
amount
equal
to
the
mandatory
redemptions
of
A
Shares
in
the
next
12
months.
Approximately
2.0
million
B
Shares
were
issued
in
1978,
about
20%
of
which
were
held
by
the
appellant.
The
contributed
surplus
in
respect
of
the
B
shares
is
to
be
used
by
Petrosar
to
pay
dividends
on
and
to
provide
funds
for
the
redemption
of
A
Shares,
in
the
event
that
the
retained
earnings
of
Petrosar
are
not
sufficient
to
enable
it
to
pay
dividends
on
the
A
Shares.
C
Shares.
These
shares
were
issued
at
a
par
value
of
$100
each
and
rank
in
priority
as
to
dividends
to
the
common
shares.
They
bear
a
fixed
cumulative
dividend
of
6.75%
and
are
redeemable
in
1990.
No
dividends
are
payable
unless
dividends
have
been
paid
on
A
and
B
Shares,
and
unless
working
capital
remaining
after
payment
of
dividends
exceeds
$10,000,000.
Similarly,
C
Shares
may
not
be
redeemed
unless
the
outstanding
B
Shares
have
been
redeemed
and
working
capital
is
maintained
equal
to
$10,000,000
plus
an
amount
equal
to
the
mandatory
redemptions
of
A
Shares
in
the
next
12
months
and
financial
ratios
are
met.
C
Shares
may
not
be
transferred,
sold,
assigned
or
otherwise
disposed
of
without
the
consent
of
holders
of
A
Shares.
9.
By
Notice
of
Reassessment
dated
June
22,
1983,
the
appellant
was
reassessed
with
respect
to
its
1978
taxation
year
and
was
required,
among
other
things,
to
take
into
its
income
for
the
1978
taxation
year
the
amount
of
$3,090,900
as
interest
or
deemed
interest
income.
11.
The
respondent
confirmed
the
Notice
of
Reassessment
referred
to
in
paragraph
9
above
by
a
Notice
of
Confirmation
dated
April
28,
1987
on
the
basis
that
the
interest
in
the
amount
of
$3,090,900
with
respect
to
the
debentures
of
Petrosar
Limited
was
determined
and
was
to
be
included
in
computing
the
appellant's
income
for
the
1978
taxation
year
in
accordance
with
the
provisions
of
paragraph
12(1)(c)
of
the
Income
Tax
Act
(Canada)
(The
'Act").
Amended
Reply
to
Notice
of
Appeal
2.
With
respect
to
paragraph
7
of
the
Notice
of
Appeal,
the
respondent
admits
only
that
Petrosar
issued
Class
A,
B
and
C
shares
as
a
result
of
its
1978
refinancing.
The
respondent
states
that
the
appellant
received
282,135
Class
C
preference
shares
on
its
own
behalf
and
117,047
on
behalf
of
Union
Carbide
Corporation,
its
United
States
parent
corporation.
5.
In
reassessing
the
appellant’s
income,
as
stated
in
paragraph
11
of
the
Notice
of
Appeal,
the
respondent
relied
upon
the
following
assumptions
and
findings
of
fact:
(b)
at
December
31,
1977,
the
appellant
held
debentures
of
Petrosar
Limited
("Petrosar"),
in
the
principal
amount
of
$25,122,600
with
respect
to
which
$3,090,900
in
interest
had
accrued
[but
was
not
owing
pursuant
to
the
terms
of
the
debentures];
(c)
pursuant
to
a
refinancing
of
Petrosar,
the
appellant
entered
into
an
agreement
whereby
the
debentures
were
redeemed
in
return
for
282,135
Class
C
Preference
Shares
of
Petrosar
valued
at
$28,213,500;
(e)
no
such
interest
had
been
included
in
the
appellant's
income
for
a
preceding
taxation
year.
[Parentheses
mine.]
The
appellant,
in
1974,
entered
into
a
joint
venture
with
Du
Pont
of
Canada
Limited
and
Polysar
Limited,
two
unrelated
Canadian
corporations,
to
construct,
own
and
operate
a
petrochemical
manufacturing
facility
in
Sarnia,
Ontario.
To
this
end
an
Ontario
company
named
Petrosar
Limited
was
incorporated.
Following
the
incorporation
of
Petrosar
and
throughout
the
relevant
period
the
appellant
held
20
per
cent,
Du
Pont
of
Canada
Limited
held
20
per
cent
and
Polysar
Limited
held
60
per
cent
of
all
the
issued
common
shares.
These
shares
were
issued
for
an
aggregate
consideration
of
$50,000,000.
The
original
construction
estimate
to
build
the
manufacturing
facility
at
Sarnia
and
start-up
costs
was
$371,000,000.
This
figure,
over
a
period
of
three
years,
mushroomed
to
some
$700,000,000.
By
the
end
of
1975,
Petrosar
had
issued
subordinate
debentures
to
Polysar
Limited,
Du
Pont
of
Canada
Limited
and
the
appellant
in
the
total
principal
amount
of
$124,000,000
upon
which
had
accrued
unpaid
interest
in
the
amount
of
$15,271,700
which
sum
of
money
by
the
terms
of
the
debentures
was
not
due.
The
financial
restructuring
is
set
out
in
two
agreements
found
under
Tabs
5
and
6
of
Exhibit
1.
Tab
5
is
the
''Sponsor's
Purchase
Agreement"
dated
January
31,
1978
among
three
Canadian
banks
as
parties
of
the
first
part,
the
appellant,
Polysar
and
Du
Pont
as
parties
of
the
second
part
and
Petrosar
as
party
of
the
third
part.
In
the
agreement,
the
parties
of
the
first
part
are
referred
to
as
"Banks";
the
parties
of
the
second
part
are
referred
to
as
"Sponsors",
or
individually
"Sponsor';
and
the
party
of
the
third
part
as
the
"Company".
The
agreement
contains
the
following
recitals:
WHEREAS
the
Banks
(and
another
bank)
have
advanced
or
committed
to
advance
to
the
Company
operating
loans
of
$100,000,000
in
the
aggregate
and
term
loans
of
$370,000,000
in
the
aggregate
to
assist
the
Company
in
the
construction
and
bringing
into
operation
of
a
world
scale
crude
oil
topping
and
petrochemical
manufacturing
facility
in
Moore
Township
near
the
City
of
Sarnia,
Ontario;
AND
WHEREAS
the
Sponsors
have
assisted
in
financing
the
Company
by
subscribing
for
shares
and/or
subordinated
debt
of
the
Company
and
by
entering
into
various
contracts
for
the
purchase
of
Products
of
the
Company
being
or
to
be
produced
at
the
Plant
and
by
entering
into
covenants
and
agreements
with
the
Banks;
AND
WHEREAS
Canada
Development
Corporation
(hereinafter
referred
to
as
CDC")
a
corporation
incorporated
by
an
Act
of
the
Parliament
of
Canada,
has
given
certain
guarantees
and
undertakings
to
the
Banks
in
respect
of
certain
of
the
obligations
of
Polysar
to
the
Banks;
AND
WHEREAS
the
Company
desires
to
obtain
refinancing
for
various
purposes
including
retiring
its
Term
Indebtedness
by
repaying
such
Term
Indebtedness
from
the
proceeds
of
the
issuance
by
the
Company
of
Class
A
Preference
Shares
to
the
Banks
and
Class
C
Preference
Shares
to
the
Sponsors;
AND
WHEREAS
the
Sponsors
have
agreed
to
enter
into
the
promises,
covenants
and
agreements
contained
in
this
Agreement
in
order
to
induce
the
Banks
to
enter
into
the
Subscription
Agreement
and
to
subscribe
for
and
purchase
the
Class
A
Preference
Shares;
AND
WHEREAS
under
the
laws
of
Canada
at
the
date
hereof
dividends
received
by
the
Banks
on
the
Class
A
Preference
Shares
will
not
be
subject
to
income
tax;
AND
WHEREAS
the
Banks
are
only
agreeable
to
subscribing
and
paying
for
Class
A
Preference
Shares
on
the
basis
that
the
dividends
thereon
continue
not
to
be
subject
to
income
tax
or
on
the
basis
that
such
dividends
be
increased
to
whatever
amount
is
required
to
return
to
the
Banks
the
same
amount
as
if
the
dividends
on
such
Class
A
Preference
Shares
had
been
paid
and
received
by
the
Banks
free
of
liability
to
pay
income
tax
thereon;
AND
WHEREAS
the
Sponsors
have
agreed
to
assure
the
Banks
that
such
return
will
be
realized
by
the
Banks
and
to
assure
that
the
redemption
provisions
associated
with
the
Class
A
Preference
Shares
are
met
or
satisfied;
AND
WHEREAS
CDC
has
by
a
separate
agreement
of
even
date
herewith
given
a
guarantee
and
undertaking
in
respect
of
certain
of
the
obligations
of
Polysar
hereunder;
The
agreement
then
goes
on
to
provide,
inter
alia,
for
detailed
undertakings
by
the
Sponsors
to
give
effect
to
what
is
said
in
the
recitals
including,
of
course,
guarantees
in
relation
to
the
Class
A
Preference
shares.
On
January
31,
1978
a
separate
"Subscription
Agreement"
was
entered
into
between
Petrosar
and
the
Banks
whereby
the
latter
agreed
to
acquire
a
large
number
of
Class
A
shares.
The
four
principal
features
of
the
refinancing
as
set
out
in
these
agreements
are:
(i)
The
issue
by
Petrosar
of
Class
A,
B
and
C
shares,
the
terms
and
conditions
of
which
are
set
out
above.
(ii)
The
purchase
of
4,450,000
Class
A
Preference
shares
the
banks
buy
at
$100
each
for
a
total
of
$445,000,000.
The
stated
purpose
of
these
funds
was
to
enable
Petrosar
"to
retire
currently
outstanding
term
loans
and
other
term
indebtedness
together
with
accrued
and
unpaid
interest
thereon
owing
to
the
banks
and
others
presently
aggregating
approximately
$420,000,000
and
to
provide
the
company
with
additional
working
capital.”
(iii)
The
acquisition
of
Class
B
shares
by
the
Sponsors
in
these
circumstances:
If
the
Company
shall
not
have
sufficient
funds
or
otherwise
be
in
a
position
to
declare
and
pay
dividends
on
the
Class
A
Preference
Shares
when
due,
each
Sponsor
shall
severally
subscribe
to
the
Company
and
pay
for
Class
B
Preference
Shares
in
the
proportions
applicable
to
each
Sponsor
hereinafter
set
forth,
in
such
numbers,
at
the
price
of
$100
for
each
Class
B
Preference
Share,
as
shall
be
necessary
to
provide
the
Company
with
sufficient
funds
to
declare
and
pay
all
dividends
accrued
on
the
Class
A
Preference
Shares
when
due
in
accordance
with
the
conditions
of
the
Class
A
Preference
Shares
and
the
Company
shall
allot
and,
on
payment
shall
issue,
such
Class
B
Preference
Shares
to
the
Sponsors.
The
proportions
referred
to
above
are
as
follows:
|
Polysar
|
48.0%
|
|
DuPont
|
21.6%
|
|
Union
Carbide
|
30.4%
|
|
100.0%
|
(iv)
The
retirement
of
the
debenture
debt
and
the
accrued
interest
thereon
by
the
Sponsors
by
the
issue
to
them
of
Class
C
Preference
shares
in
these
numbers:
Appellant
(399,182),
Polysar
(696,432)
and
Du
Pont
(297,603).
By
resolution
the
Board
of
Directors
of
Petrosar
authorized
the
entering
into
of
the
"Sponsors
Agreement"
and
the
“Subscription
Agreement"
and
the
officers
of
Petrosar
were
authorized
to
sign
them.
By
separate
resolution
the
Board
accepted
the
subscription
of
the
appellant
for
399,182
Class
C
Preference
shares
with
the
par
value
of
$100
each.
It
also
accepted
the
subscriptions
of
Polysar
and
Du
Pont
in
the
numbers
already
indicated.
The
total
number
of
Class
C
Preference
shares
involved
in
the
three
subscriptions
was
1,392,717
and
the
total
price
was
$139,271,700.
Paragraphs
3
and
4
of
the
said
resolution
read
as
follows:
3.
The
Company
having
agreed
that
the
aggregate
subscription
price
of
$139,271,700
for
the
1,392,717
Class
C
Preference
Shares
Series
One
so
subscribed
for
shall
be
satisfied
by
the
surrender
thereof
to
the
Company
on
the
Closing
Date,
for
cancellation
of
$124,000,000
aggregate
principal
amount
of
Subordinated
Debentures
of
the
Company
upon
which
unpaid
interest
of
$15,271,700
will
have
accrued
to
and
including
January
31,
1978,
which
aggregate
principal
amount
and
interest
is
owed
by
the
Company
to
the
said
subscribers,
the
Company
shall
on
the
Closing
Date
apply
the
said
sum
of
$139,271,700
in
full
payment
of
the
said
subscription
price
for
the
said
1,392,717
Class
C
Preference
Shares
Series
One
subscribed
for
as
aforesaid.
4.
The
directors
hereby
expressly
determine
that
the
consideration
for
the
allotment
and
issue
of
the
said
Class
C
Preference
Shares
Series
One
as
aforesaid,
namely
the
payment
of
the
aggregate
sum
of
$139,271,700
by
such
application
of
the
aggregate
principal
amount
of
an
interest
accrued
on
the
said
Subordinated
Debentures
is
in
all
the
circumstances
of
the
transaction
the
fair
equivalent
of
a
consideration
payable
in
cash
on
such
date
of
$139,271,700
(being
an
amount
equal
to
the
aggregate
par
value
of
the
said
1,392,717
Class
C
Preference
Shares
Series
One)
and
it
is
hereby
directed
that
the
said
1,392,717
Class
C
Preference
Shares
Series
One
be
and
the
same
are
hereby
allotted
and
shall
on
the
Closing
Date
be
issued
as
fully
paid
and
non-assessable
shares
and
that
certificates
representing
the
said
1,392,717
Class
C
Preference
Shares
be
issued
and
delivered
to
the
said
subscribers
in
accordance
with
their
subscriptions
set
forth
above.
lt
appears
that
the
directors
of
Petrosar
followed
the
provisions
of
section
44
of
the
Ontario
Business
Corporations
Act,
R.S.O.1970
c.53
(the
O.B.C.A.).
That
section,
as
applicable
in
1978,
reads
as
follows:
(2)
Shares
with
par
value
shall
not
be
allotted
or
issued
except
for
a
consideration
at
least
equal
to
the
product
of
the
number
of
shares
allotted
or
issued
multiplied
by
the
par
value
thereof.
(4)
No
share
shall
be
issued
until
it
is
fully
paid
and
a
share
is
not
fully
paid
until
all
the
consideration
therefor
in
cash,
property
or
services,
as
determined
under
this
section,
has
been
received
by
the
corporation.
(5)
For
the
purposes
of
subsection
(4)
.
.
.
the
value
of
property
or
services
shall
be
the
value
the
directors
determine
by
express
resolution
to
be
in
all
the
circumstances
of
the
transaction
the
fair
equivalent
of
the
cash
value.
The
“Subscription
Agreement”
dated
January
31,
1978
between
the
appellant
and
the
Banks
(Tab
6)
contains
the
following
paragraphs:
Article
III
Representations
and
Warranties
Section
3.08.
Capitalization.
The
Company's
authorized
capital
consists
of
5,000,000
Class
A
Preference
Shares,
4,450,000
of
which
will
be
issued
and
outstanding
as
fully
paid
and
nonassessable
at
the
closing,
2,500,000
Class
B
Preference
Shares,
200,000
of
which
will
be
issued
and
outstanding
as
fully
paid
and
non-assessable
at
the
closing,
7,500,000
Class
C
Preference
Shares,
1,392,717
Series
One
of
which
will
be
issued
and
outstanding
as
fully
paid
and
non-assessable
at
the
closing,
and
4,000,000
common
shares,
of
which
3,000,000
are
issued
and
outstanding
as
fully
paid
and
non-assessable.
Article
IV—Conditions
Precedent
to
Closing
(d)
Subscription
for
Class
C
Preference
Shares
and
Cancellation
of
Indebtedness
The
Sponsors
or
their
affiliates
shall
have
subscribed
and
paid
for
in
full
Class
C
Preference
Shares
having
an
aggregate
par
value
equal
to
the
principal
amount
of
and
interest
accrued
on
all
Indebtedness
of
the
Company
issued
as
subordinated
debt
within
the
meaning
of
the
Loan
Agreement
then
held
by
them
and
shall
have
surrendered
to
the
Company
for
cancellation
the
instruments
evidencing
the
same,
all
as
payment
for
such
Class
C
Preference
Shares;
Schedule
"E"
(Being
the
Legal
Opinion
Required
to
Be
Given
to
the
Banks)
7.
1,392,717
Class
C
Preference
Shares
Series
One
have
been
duly
and
validly
allotted
and
issued
to
the
Sponsors
for
an
aggregate
consideration
of
$139,271,700
which
has
been
duly
paid
by
the
surrender
and
cancellation
of
$124,000,000
aggregate
principal
amount
of
Subordinated
Debentures
of
the
Company
and
accrued
interest
thereon
to
and
including
January
31,
1978
of
$15,271,700
and
such
shares
are
outstanding
as
fully
paid
and
non-assessable
shares
and
are
the
only
Class
C
Preference
Shares
that
are
outstanding;
The
appellant
in
its
financial
statement
for
the
year
ended
December
31,
1978
which
formed
part
of
the
income
tax
returns
carried
the
following
notes
to
financial
statements:
2.
Summary
of
accounting
policies.
(a)
Investments—Investment
in
associated
companies
consist
of
shares
and
advances
at
cost.
Other
investments
(including
Petrosar
Limited
referred
to
in
Note
3)
are
carried
at
cost.
3.
Commitment
During
the
year
the
Company
subscribed
for
$28,213,500
of
preference
shares
of
Petrosar
Limited
replacing
its
subordinated
debentures
and
for
an
additional
$6,701,500
of
preference
shares
of
Petrosar
Limited
in
each
case
ranking
in
all
respects
behind
the
Class
A
preference
shares
held
by
Petrosar's
bankers.
The
Class
A
preference
shares
carry
the
right
to
a
cumulative
preferential
floating
rate
dividend
and
are
retractable
over
a
period
expiring
December
31,
1987.
Two
witnesses
gave
evidence
on
behalf
of
the
appellant
namely
Mr.
Douglas
Coate
and
Mr.
James
Doak.
Douglas
Coate,
a
director
as
well
as
being
a
vice-president,
and
the
secretary
and
general
counsel
for
the
appellant
stated
that
the
appellant,
in
1978,
did
not
expect
to
receive
dividends
on
the
Class
C
Preference
shares
in
the
foreseeable
future.
Nor
did
he
expect
the
same
Class
C
Preference
shares
to
be
redeemed
in
the
foreseeable
future.
Upon
cross-examination
Mr.
Coate
was
asked
what
he
meant
by
the
foreseeable
future
and
he
answered
"as
far
as
the
Board
of
Directors
could
project
or
envisage
the
interest
accruing
on
the
Class
C
Preference
shares
would
never
be
paid
nor
would
they
ever
be
redeemed."
James
Doak,
a
vice-president
and
director
of
First
Marathon
Securities
Limited,
and
an
acknowledged
expert
in
the
chemical
securities
field,
stated
that
in
his
opinion
the
said
Class
C
Preference
shares
in
1978
had
no
value.
This
opinion
was
not
challenged
by
the
respondent
either
in
cross-
examination
or
by
other
evidence.
Mr.
Doak
did
admit,
on
cross-
examination,
that
he
based
his
opinion
on
the
value
of
Petrosar
to
third
parties
and
did
not
attempt
to
value
the
preference
shares
in
the
hands
of
the
appellant.
Mr.
Doak
based
his
opinion
on
several
factors,
namely:
(i)
the
large
cost
overrun
in
building
the
plant
which
resulted
in
the
capital
cost
per
annual
pound
capacity
of
Petrosar
was
higher
than
that
available
elsewhere;
(ii)
the
configuration
of
the
Petrosar
plant,
especially
its
lack
of
feedstock
flexibility
and
production
of
residual
fuel
oil;
(iii)
the
disadvantageous
oil
feedstock
pricing,
due
to
discriminatory
Alberta
treatment
and
transport
costs;
and
(iv)
the
non-optimal
capacity
utilization
due
to
soft
product
markets
for
ethylene
derivatives
and
rising
hydrocarbon
prices.
It
is
apparent
the
appellant
herein
is
trying
to
have
the
best
of
both
worlds
in
that,
on
the
one
hand,
to
avoid
having
Petrosar
reduce
the
capital
cost
of
its
depreciable
property
by
$124
,000,000
pursuant
to
paragraph
80(1)(b)
the
principal
amount
of
the
debt
is
not
forgiven
but
exchanged
for
Class
C
Preference
shares
having
a
stated
capital
value,
and,
on
the
other
hand,
to
avoid
paying
tax
on
the
accrued
interest
of
$3,090,900
the
Class
C
Preference
shares
are
said
to
have
no
value.
The
Court
must
look
at
all
the
evidence
before
it
to
determine
what
the
parties
intended.
In
my
opinion
in
1977
and
1978
there
were
good
and
valid
reasons
why
the
sponsor
companies
entered
into
these
agreements
to
capitalize
the
accrued
interest
by
way
of
Class
C
Preference
shares
rather
than;
(i)
writing
off
the
said
accrued
interest,
or
(ii)
just
giving
a
written
acknowledgement
of
the
accrued
interest
debt.
The
only
evidence
of
what
the
appellant's
directors
thought
or
how
they
treated
the
value
of
the
debt
or
the
Class
C
preference
shares
or
both
is:
(i)
the
agreements
referred
to
above;
(ii)
the
provisions
of
the
O.B.C.A.
and
the
resolution
passed
pursuant
thereto;
(iii)
the
comment
attached
to
the
appellant's
1978
financial
statement.
Mr.
Coate
did
not
say
that
the
directors
of
the
appellant
believed,
in
January
of
1978,
that
the
subordinate
debentures
or
the
Class
C
Preference
shares
or
both
were
worthless.
Indeed,
he
was
not
even
asked
this
question.
No
officer
or
director
of
the
appellant
gave
evidence
that
at
the
time
of
the
restructuring
he
believed
the
debentures
or
the
Class
C
Preference
shares
or
both
were
worthless.
It
is
simply
not
acceptable
to
this
Court
to
place
in
evidence
after
the
fact
testimony
of
an
expert
without
some
substantiating
evidence
from
either
the
appellant
itself
or
from
its
1978
documentation.
The
appellant
had
a
representative
on
the
Board
of
Directors
of
Petrosar.
It
knew
or
should
have
known
the
wording
of
its
resolutions.
There
was
value
to
the
sponsor
companies
in
entering
into
the
above-mentioned
agreement
in
order
to
obtain
the
bank
financing
and
to
restructure
the
debt.
Thus,
the
said
Class
C
Preference
shares
had
value
to
the
appellant.
I
am
satisfied
on
the
authorities
quoted
and
in
particular
from
the
words
of
Viscount
Simon
in
Humphrey
v.
Gold
Coast
Selection
Trust
Ltd.,
[1948]
A.C.
459;
[1948]
2
All
E.R.
379;
30
T.C.
209
that
the
value
of
the
preference
shares
is
a
question
of
evidence,
and
evidence
alone.
He
said
at
(T.C.)
p.
240:
If
the
asset
takes
the
form
of
fully
paid
shares,
the
valuation
will
take
into
account
.
.
.
a
number
of.
.
.
factors,
such
as
prospective
yield,
marketability,
the
general
outlook
for
the
type
of
business
of
the
company
which
has
allotted
the
shares,
the
result
of
a
contemporary
prospectus
offering
similar
shares
for
subscription,
the
capital
position
of
the
company,
and
so
forth.
There
may
also
be
an
element
of
value
in
the
fact
that
the
holding
of
the
shares
gives
control
of
the
company.
If
the
asset
is
difficult
to
value,
but
is
none
the
less
of
a
money
value,
the
best
valuation
possible
must
be
made.
Valuation
is
an
art,
not
an
exact
science.
Mathematical
certainty
is
not
demanded,
nor
indeed
is
it
possible.
Based
on
all
the
evidence
before
me,
I
am
not
satisfied
that
the
Class
C
preference
shares
had
no
value.
Therefore,
the
appellant
has
failed
to
satisfy
the
onus
on
it
of
proving
that
the
assumptions
made
by
the
respondent
in
reassessing
were
wrong.
It
strikes
me
that
a
finding
that
the
Class
C
preference
shares
were
valueless
involves
accepting
these
conclusions
that,
to
my
mind,
are
not
established
namely:
(i)
the
subordinated
debentures
were
worthless,
(ii)
the
Board
of
directors
of
Petrosar
passed
the
resolution
set
out
above
in
bad
faith
and
were
deliberately
contravening
the
O.B.C.A.,
(iii)
the
legal
opinion
given
to
the
banks
concerning
the
issuing
of
the
preference
shares
was
based
on
insufficient
or
false
information
or
both,
(iv)
the
Board
of
Directors
of
the
appellant
were
prepared
to
mislead
the
shareholders
of
the
appellant
when
it
approved
the
December
31,
1978
financial
statement.
I
prefer
to
accept
the
documentation:
(i)
as
expressing
the
true
intention
of
the
parties;
(ii)
indicating
that
the
Class
C
preference
shares
had
value;
and
(iii)
manifesting
the
proper
conduct
of
the
Board
of
Directors
of
both
Petrosar
and
the
appellant.
I
also
note
that
it
was
the
position
of
both
counsel
that
the
appellant
succeeds
or
fails
on
a
determination
of
the
question
whether
the
Class
C
preference
shares
were
of
no
value.
They
agree
that
for
the
purposes
of
this
appeal
it
is
not
for
the
Court
to
attempt
to
place
a
monetary
value
on
the
shares
if
they
have
some
value.
The
appeal
is
dismissed.
Appeal
dismissed.
Email this Content