The taxpayers entered an arrangement with a corporation ("Blue Hill") in order to deduct Canadian resource expenditures from income:
- the taxpayers paid $2 for an option to acquire an interest in mineral claims owned by Blue Hill;
- in exercising the options, the taxpayers agreed to engage Blue Hill to incur CRE on their behalf in consideration for promissory notes
Lyons J found (at para. 42) that the taxpayers were not required by Blue Hill to pay the promissory notes. The taxpayers also made an out-of-pocket payment, not referred to in the agreements, for 25% of the face value of the notes.
Although the taxpayers apparently argued that the property actually acquired by the taxpayers (the option agreement) would not give rise to any deductions, Lyons J agreed with the Minister that the interests in the mineral claims were the tax shelter. Blue Hill's principal had specifically promoted the interests on the basis that they would lead to an income deduction of four times the purchasers' outlays (which was the purchasers' only cost as the promissory notes were a prescribed benefit under Reg. 231(6) (now Reg. 31001).). As Blue Hill had been assessed penalties under s. 237.1(7.4) which were not paid, the Minister was correct to deny the taxpayers' deductions under s. 237.1(6.1).
See summary under Reg. 3100(1).