Section 211.91

For its 2002 to 2006 years, the taxpayer (“Tusk Exploration” - a Canadian exploration company) renounced Canadian exploration expenses (“CEE”) under s. 66(12.6) using the Look back” rule under s. 66(12.66). However, approximately 97% of these renunciations were made to shareholders with whom Tusk did not deal at arm’s length, so that the look back rule was unavailable. Furthermore, there was a deficiency in the amount of CEE incurred by Tusk in the applicable subsequent years as compared to the CEE renounced for the look-back years. The shareholders with whom Tusk Exploration was not dealing at arm’s length were reassessed to deny the claims for CEE that had been renounced under s. 66(12.6) because of the application of s. 66(12.66) and were assessed interest on the resulting increase in tax liability - but were allowed to claim CEE for the year in which the CEE was actually incurred.

Tusk Exploration argued that it was not subject to Part XII.6 tax on the CEE expenses because the reference in Part XII.6 to CEE that it “purported” to renounce under the rule referred only to expenses which had been validly rather than invalidly renounced under the look-back rule: the reference to “purports to renounce” in s. 66(12.73) (which informed the meaning of the same phrase appearing in s. 211.91(1)) was only to allow the Minister to reduce the amounts that shareholders may claim for a previous year if there was a shortfall in the actual amount of CEE incurred, and did not apply to CEE renounced to a non-arm’s length person.

In rejecting this submission and confirming the Minister’s assessment of Tusk Exploration under Part XII.6, Webb JA stated (at paras 28-29):

… [T]he reference to “purports to renounce” in subsection 66(12.73) … is a reference to an amount that the corporation stated in the forms that it filed that it was renouncing and hence an amount that it claimed that it was renouncing. This would include amounts that were validly renounced and amounts that it could not renounce because any of the conditions of subsection 66(12.66) …were not satisfied. Furthermore, since subsection 66(12.73) … refers to both an amount that a corporation “purports to renounce” and to an amount that a corporation “can renounce”, amounts that a corporation “purports to renounce” cannot be restricted to only amounts that it “can renounce”. Because Parliament has chosen to use two different expressions, it must mean that Parliament did not intend for the two expressions to be synonymous.

… [P]aragraph 66(12.73)(d) … provides that any reduction in the amounts renounced does not affect the calculation of the amount payable under Part XII.6… . Therefore, Part XII.6 tax is not affected by any change in the amounts renounced as reflected in the statement filed with the Minister under subsection 66(12.73)… .

Furthermore, the additional requirement in (b)(v) of the s. 248(1) definition of “specified future tax consequence” that a purported renunciation be made to an arm’s length taxpayer implied that a renunciation could be purported to be made to a non-arm’s length shareholder (para. 39).