Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
1) Whether an election pursuant to subsection 39(4), is available for flow through shares;
2) The point at which a newly created corporation achieves a "principle business corporation status" to the extent that it may not have engaged in any of the activities enumerated in the definition of "principle business corporation status".
Position:
1) Election pursuant to subsection 39(4), is not available for a flow-through share.
2) Depends on the facts of the situation.
Reasons:
1) Election pursuant to subsection 39(4), is not available for a flow-through share because it is a prescribed security that is excluded from the definition of a Canadian security.
2) Generally speaking a new corporations activities in preparing its offering memorandum, it's business plan and developing it's organizational structure could be indications that it has commenced business thereby achieving the principal business corporation status.
2001-009830
XXXXXXXXXX Mohamud Jivraj
(613) 957-9796
June 13, 2002
Dear XXXXXXXXXX:
Re: Your Request for Technical Interpretation
This is in response to your letter of August 24, 2001 regarding various issues pertaining to flow-through shares within the meaning of subsection 66(15) of the Income Tax Act ("the Act").
1. We confirm your understanding that an election pursuant to subsection 39(4) of the Act, is not available for a flow-through share because it is a prescribed security that is excluded from the definition of a Canadian security in subsection 39(6) of the Act.
2. With respect to the disposition of flow through shares, if subsection 47(1) of the Act applies in respect of flow-through shares that are identical to non-flow-through shares, the CCRA does not have an administrative position that would allow a taxpayer to differentiate the flow- through-shares from identical non-flow through shares.
3. Flow through shares can only be issued by a principal business corporation. When a newly incorporated company ("Newco") raises money, e.g., through an offering memo and not carrying on activities as listed in the definition of "principal business corporation" in the Act, there is a concern that it is not a principal business corporation.
In our opinion, to be a principal business corporation at a particular time, a corporation does not necessarily have to be carrying on the activities listed in the definition of the principal business corporation. As long as the business of the corporation has commenced and it is clear that the business is described in the
definition of principal business corporation as defined in subsection 66(15), the corporation will be considered to be a principal business corporation from the commencement of its business.
Pursuant to IT-364, we would consider that the business has commenced if the following conditions are met:
"it is the Department's view that a business commences whenever some significant activity is undertaken that is a regular part of the income-earning process in that type of business or is an essential preliminary to normal operations. In order that there be a finding that a business has commenced, it is necessary that there be a fairly specific concept of the type of activity to be carried on and a sufficient organizational structure assembled to undertake at least the essential preliminaries."
A new corporation's activities in preparing an offering memorandum, a business plan and developing its organizational structure could be indications that it has commenced business.
The above comments are merely the expressions of those CCRA officials named herein and as such should not be construed as advance income tax rulings, nor are they binding on the Agency.
If you have any questions concerning this matter, please contact the writer.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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