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: Whether the general anti-avoidance rule ("GAAR") would apply in a situation involving the issuance of shares, intended to be flow-through shares, where the subscription agreement provides that a third-party public corporation will subsequently make an offer to purchase the shares at fair market value with individual investors then seeking to claim a deduction under subsection 110.6(2.1) in respect of any capital gain.
Position: Whether or not GAAR will apply in a particular situation must be determined based upon all of the facts relevant to that situation. The fact that the transactions involve the benefits of two incentive provisions would not, in and by itself, result in the application of GAAR to the transactions unless the results are so inconsistent with the general scheme of the Act that they cannot have been within the contemplation of Parliament. However, it would also be a question of fact whether such a share would be a "prescribed share" and therefore precluded from qualification as a flow-through share.
Reasons: Nature of the determination.
XXXXXXXXXX 2003-001803
A. A. Cameron
(613) 347-1361
July 18, 2003
Dear XXXXXXXXXX:
Re: Flow-Through Shares
We are writing further to your letter of April 16, 2003 wherein you requested a technical interpretation as to whether the general anti-avoidance rule ("GAAR") in subsection 245(2) of the Income Tax Act (the "Act") would apply in a situation involving the issuance of shares, each of which is intended to be a "flow-through share" as defined in subsection 66(15) of the Act.
In particular, under the situation envisioned, individuals would acquire common shares of a "Canadian-controlled private corporation" (a "CCPC", as defined in subsection 125(7) of the Act) which would enter into a farm-in arrangement with a "public corporation" (as defined in subsection 89(1) of the Act) pursuant to which the CCPC would incur expenditures that may potentially qualify for renunciation to investors in flow-through shares. Under the arrangements relating to the subscription for the above shares, the public corporation would agree to make an offer to the investor (such offer to be made at least two years after the acquisition of the shares by the investor), to purchase the shares for their fair market value at that time. An individual investor so disposing of shares would seek to claim a deduction under subsection 110.6(2.1) of the Act in respect of any capital gain arising on such disposition. You have indicated that each share of the CCPC would be a "qualified small business corporation share" (as defined in subsection 110.6(1) of the Act) at the time of disposition by an investor, and that the investor's "cumulative net investment loss" (also as defined in that subsection) would be nil after the disposition.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.htm l.
Whether or not the CCRA would seek to apply the provisions of subsection 245(2) of the Act in a particular situation can only be determined following a thorough review of all of the facts relevant to that situation. The CCRA's general views on the application of subsection 245(2) of the Act are found in Information Circular 88-2, General anti-avoidance rule - Section 245 of the Income Tax Act. As noted in paragraph 5 of Information Circular 88-2, transactions designed to take advantage of specific incentive provisions in the Act will only be subjected to GAAR where the results are so inconsistent with the general scheme of the Act that they cannot have been within the contemplation of Parliament. The fact that a transaction results in a taxpayer being eligible to take advantage of two separate and distinct incentive provisions in the Act should not, in and by itself, result in the application of the GAAR. The determination of whether the results would be considered so inconsistent with the general scheme of the Act that they cannot have been within the contemplation of Parliament would only be addressed in the context of an advance income tax ruling request containing a GAAR submission.
It should be kept in mind that it would also have to be determined from the facts relevant to the situation under consideration whether a share issued to an investor would be a "prescribed share" (as described in section 6202.1 of the Income Tax Regulations) and therefore precluded from qualification as a flow-through share. In particular, we would note that if at the time the share is issued the issuing corporation, or a person with whom that corporation does not deal at arm's length, may reasonably be expected to acquire the share in whole or in part within 5 years after the date the share is issued, the provisions of paragraph 6202.1(1)(d) of the Regulations may cause the share to be a prescribed share.
We trust that these comments will be of assistance.
Yours truly,
Mickey Sarazin, C.A.
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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