Flow-through share issues may need to be addressed in an M&A transaction with a principal business corporation

Flow-through share (FTS) issues arising in an M&A context include:

• Where a merger agreement has been signed between the target principal business corporation (PBC) and an acquiror and the target thereafter issues FTS, those FTS could be prescribed shares under Reg. 6202.1(1)(d).
• Somewhat similarly, given an apparent CRA position that s. 84(9) can apply to deem FTS to be disposed of, on an amalgamation, to the PBC, FTS which are issued after the announcement of a long-form amalgamation may result in a prescribed share issue under Reg. 6202.1(1)(d).
• It could be argued that since a corporation is not wound up until it is dissolved rather than the earlier time that it makes a winding-up distribution of its business to its parent, the continuity rule in s. 88(1.5) does not work during this gap in time.
• It is unclear whether the continuity rule in s. 87(4.4) works where, on an amalgamation, the amalco issues a replacement share to someone who had acquired the “old” FTS from someone who, in turn, had acquired the FTS from the original subscriber, i.e., there are two subsequent purchases of the FTS rather than only one.

In private discussions, CRA:

confirmed that the subscription agreement need not restrict damages to additional federal and provincial taxes payable, as the CRA considers a general common law right to sue for damages otherwise available as not constituting a prescribed share issue.

Some Alberta decisions effectively confirm that the FTS holder's contractually-provided right to damages for addition taxes disappears on a CCAA compromise.

Neal Armstrong. Summaries of Gregory M. Johnson and Wesley R. Novotny, “An Update on Flow-through Shares in the Energy Sector” 2016 CTF Annual Conference draft paper under s. 66(15) - flow-through share, Reg. 6202.1(1)(d), s. 88(1.5), s. 87(4.4)(d)(i), Reg. 6202.1(1.1)(c), Reg. 6202.1(5) - excluded obligation, s. 66(12.73), s. 163(2.21).