Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: Where the death of an individual occurs in the year he acquired flow-through shares, whether a deduction for the CEE or CDE renounced by the resource corporation or an investment tax credit for flow-through mining expenditures will be available on the final return of the deceased.
Position: A corporation may only renounce its CEE and CDE incurred in favour of the individual who acquired the flow-through shares. A renunciation in favour of an individual cannot be made effective after the death of that individual. The renunciation is in respect of the expenses that are incurred on or before the effective date of the renunciation. Therefore, the deceased person may have the right to deduct CEE or CDE in his final tax return or to claim an investment tax credit depending on the circumstances (the effective date of the renunciation, for example). However, the estate of the individual or the beneficiaries of the estate will not benefit from any renunciation with respect to shares acquired by the deceased.
Reasons: The renunciation has to be made in favour of the person who acquires the flow-through shares. Upon death, the person ceases to exist and the corporation cannot renounce in favour of a person who ceases to exist. Wording of the Act and previous position.
Financial Strategies and Financial Instruments Roundtable, 11 October 2013
2013 APFF Conference
Question 8
Flow-Through Shares on Death
An individual who acquires flow-through shares of a principal-business corporation ("PBC") may be entitled to a number of tax benefits. As a result, the PBC may renounce, to the initial investor, certain Canadian exploration expenses ("CEE") and also Canadian development expenses ("CDE"). The PBC may renounce CEE, which is added to the cumulative Canadian exploration expense ("CCEE") account, which can be deducted up to 100% of the available balance. The CDE renounced by the PBC is added to the cumulative Canadian development expense ("CCDE") account and can be deducted up to a maximum of 30% of the available balance. Investors are entitled to deduct from their income (in their tax return) the expenses (CEE and CDE) renounced by the PBC. In addition, if the PBC's expenses qualify (flow-through mining expenditures) and the investor is an individual, then he or she will be able to benefit from a non-refundable tax credit of 15% of these mining expenditures. In exchange and in order to reflect these numerous tax benefits, the adjusted cost base ("ACB") of the PBC share is deemed to be nil.
According to Technical Interpretation 9330455 published on March 29, 1994, an investor who dies in the year of the initial purchase of shares of a PBC will not be entitled to deduct the CEE or CDE unless the renunciation is made and is valid before the death of the investor. In addition, the estate of the deceased would not be entitled to deduct the CEE or CDE because it must be renounced to the original purchaser of the shares of the PBC and the latter (the estate) is not considered to be the initial purchaser. We would therefore like more clarity to better understand the tax consequences of holding flow-through shares on death.
Questions to the CRA
1. For an individual who acquired flow-through shares of a principal-business corporation (PBC) on February 1, 2013, entered into a flow-through share agreement in writing, and died on March 1, 2013, what deductions and credits is the deceased entitled to in the deceased's final income tax return?
2. What deductions and credits may be available to the estate or beneficiaries of the estate?
3. Same situation as above, but the individual dies on December 30, 2013?
4. Would the answer be the same if the individual dies on December 31 or January 1, 2014?
5. Same as situation 2, 3 and 4, but for greater clarity the PBC renounced pursuant to subsection 66(12.66) all of its Canadian exploration expenses (CEE) on February 15, 2014 in accordance with all the requirements of section 66 and following for an amount totaling $X per flow-through share issued by the PBC?
CRA response
In certain circumstances and subject to certain conditions, a PBC may renounce CEE or CDE in to a person who has entered into an agreement with the PBC in respect of flow-through shares that that person acquired.
Where a PBC renounces CEE or CDE in accordance with subsection 66(12.6), it may choose for the renunciation to take effect on a date prior to the date the renunciation is made. In order for the renunciation to be valid, the PBC must, among other things, file the prescribed form on which the effective date is indicated, within the time limit set out in subsection 66(12.7).
The CRA has taken the position that a renunciation of CEE or CDE by a PBC to a particular person cannot take effect after the death of that person because the particular person ceases to exist at the time of death. In addition, and subject to subsection 66(12.66), a PBC cannot renounce any expenses that it has incurred on or before the date the renunciation takes effect.
For the purposes of the flow-through share regime described in the Act, the estate of a deceased person and the beneficiaries of the estate cannot be considered as the same person as the deceased. The PBC cannot, therefore, renounce CEE or CDE to them in respect of the PBC flow-through shares acquired by the deceased who had entered into an agreement with that PBC for such flow-through shares. As a result, the estate or beneficiaries of the estate will not be entitled to any deduction or credit in respect of the flow-through shares.
For example, if the death occurs on March 1, 2013 and the renunciation takes effect on March 1, 2013, the PBC cannot renounce to the deceased, with respect to the flow-through shares of this deceased person, the CEE and CDE it incurred on or before March 1, 2013.
Under subsection 66(12.61), where a corporation renounces an amount to a person by virtue of subsection 66(12.6) or 66(12.601), the CEE or CDE to which the amount relates is deemed to be CEE incurred in that amount by the person on the effective date of the renunciation, subject to subsections 66(12.69) to (12.702). Similarly, under subsection 66(12.63), if under subsection (12.62) a corporation renounces an amount to a person, the CDE to which the amount relates will be deemed to be CDE incurred in that amount by the person on the effective date of the renunciation, subject to subsections 66(12.691) to (12.702).
Thus, if a valid renunciation is made by the PBC pursuant to subsection 66(12.7) and the renunciation takes effect on or before the date of death (taking into account the CEE and CDE incurred by the PBC up to the effective date), the CEE and CDE deemed to be incurred by the deceased under subsections 66(12.61) or 66(12.63) increase the CCEE and the CCDE of the deceased. It would then be possible to deduct in the deceased's final return, CEE and CDE up to the amounts permitted by virtue of subsections 66.1(3) and 66.2(2).
With respect to the tax credit in respect of flow-through mining expenditures, it is necessary to consider whether the conditions referred to in the definition of "flow-through mining expenditures" in subsection 127(9) are satisfied by taking into account the amount deemed to have been incurred by the deceased by virtue of subsection 66(12.61) and the date on which the renunciation takes effect. Given the temporary nature of the tax credit for flow-through mining expenditures, the date on which the corporation incurred the exploration expenses in Canada and the date the agreement described in subsection 66(12.6) is concluded, could be determining factors in determining whether the expenditures are flow-through mining expenditures.
With respect to the application of subsection 66(12.66), one of the conditions for this subsection to apply in order to permit expenses incurred in 2014 to be taken into account is that the renunciation takes effect on December 31, 2013. Consequently, a person who dies before December 31, 2013 cannot benefit from the expenses referred to in subsection 66(12.66) and incurred by a PBC in 2014. If death occurs on or after December 31, 2013, consideration should be given to whether the conditions for the application of subsection 66(12.66) are satisfied to determine whether the expenses referred to in subsection 66(12.66) are deemed to have been incurred on December 31, 2013 and the deceased can include these expenses in the deceased’s CCEE or CCDE balance.
Furthermore, if subsection 70(5) applies to the given situation, the flow-through shares held by the deceased could result in a capital gain calculated using the fair market value of the flow-through shares immediately before the death since the deceased would be deemed to have acquired the flow-through shares at a nil cost by virtue of subsection 66.3(3).
Sylvie Labarre
2013-049527
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