2003 Ruling 2003-0029053 - CEE Flow-Through Shares Donation

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:

Does the Act allow CEE to be allocated and deducted by the Investors in the proposed series of transactions?

Position:

Yes.

Reasons:

Through the use of flow-through shares, the Act provides for the allocation and deduction of CEE by the Investors in the proposed series of transactions.

XXXXXXXXXX 2003-002905

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX (the "Company") (XXXXXXXXXX)

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above named taxpayer. We also acknowledge the information provided during our various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the Ruling request:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) is the subject of a Ruling previously issued by the Directorate to the taxpayer or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Facts

1. The Company is a Canadian-controlled private corporation formed under the laws of XXXXXXXXXX. The expression "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7) of the Act. The Company is in the business of investment management.

2. The Company's mailing address is: XXXXXXXXXX. The Company files its corporate tax returns at the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Tax Services Office.

3. XXXXXXXXXX ("Fundco") is an open end mutual fund corporation as defined in subsection 131(8) of the Act, that was incorporated under the Business Corporations Act (XXXXXXXXXX) on XXXXXXXXXX. Fundco is a taxable Canadian Corporation as defined under subsection 89(1) of the Act. The authorized capital of Fundco consists of XXXXXXXXXX common shares and an unlimited number of special shares designated as mutual fund shares ("the Fund Shares").

4. Holders of the Fund Shares of Fundco are entitled to receive dividends declared by Fundco and can require Fundco to redeem all or any of their Fund Shares. Fundco is valued at the close of each trading day by determining the total fair market value of Fundco's net assets and dividing the total net asset value by the number of Fund Shares (including fractional shares) outstanding on that day. The amount is known as the net asset value and is valued in Canadian dollars.

Proposed transactions

5. A limited partnership ("the Partnership") will be formed under the Partnerships Act (XXXXXXXXXX). The fiscal year end of the Partnership will be XXXXXXXXXX. The general partner of the Partnership will be a subsidiary wholly-owned corporation of the Company ("Subco"). Subco will be a taxable Canadian corporation resident in Canada. The expression "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act.

6. Units of the Partnership will be offered and sold to individuals that are resident in Canada ("the Investors") on either a private placement basis or pursuant to a prospectus document offered to the public. The Partnership will have no other assets or liabilities other than the Investors' contributions.

7. A principal-business corporation (the "Resource Corporation"), as defined in subsection 66(15) of the Act, will issue flow-through shares ("Flow-Through Shares"), as defined in subsection 66(15) of the Act. The filing requirements under subsection 66(12.68) of the Act will be met.

8. The Partnership will enter into a Flow-Through Share Agreement with the Resource Corporation. The Partnership will deal at arm's length with the Resource Corporation and the Partnership will not be a "specified person" within the meaning of subsection 6202.1(5) of the Income Tax Regulations ("Regulations") in relation to the Resource Corporation. The expression "arm's length" has the meaning assigned by subsection 251(1) of the Act.

9. On or before XXXXXXXXXX, the Partnership will use the gross subscription proceeds (the "Proceeds"), obtained from its Investors in respect of the issuance of its units, to invest in Flow-Through Shares of the Resource Corporation. The Proceeds will include any interest earned less expenses and fees, including administration and operating expenses, payable and deductible in computing the Partnership's income under the Act as of XXXXXXXXXX. The Flow-Through Shares will be capital property to the Partnership.

10. The Resource Corporation will incur and renounce Canadian exploration expenses ("CEE"), as defined in subsection 66.1(6) of the Act, or deemed CEE, as defined in subsection 66.1(9) of the Act. Pursuant to the terms of the Flow-Through Share Agreement, such CEE will be renounced in favour of the Partnership no later than XXXXXXXXXX.

11. The CEE will be allocated (subject to the "at-risk" rules in subsection 96(2.2) of the Act) to those Investors that are members of the Partnership at XXXXXXXXXX and deducted by such Investors in his or her tax return for XXXXXXXXXX pursuant to subparagraph 96(1)(d)(i) of the Act.

12. After XXXXXXXXXX, the general partner will transfer the assets, consisting of the Flow-Through Shares, of the Partnership to Fundco in exchange for Fund Shares. Such transfer will be made on a tax-deferred basis under subsection 85(2) of the Act. Fundco and all the members of the partnership will jointly elect in prescribed form and within the time referred to in subsection 85(6). The Fund Shares, the only assets of the Partnership, will be distributed to the Investors. The Partnership will be dissolved within 60 days of the transfer under subsection 85(3) of the Act. Fundco will deal at arm's length with the Partnership and the Investors.

13. Some Investors will donate their Fund Shares to a "registered charity" as defined in subsection 248(1) of the Act. The registered charity will issue an official donation receipt containing the information prescribed by subsection 118.1(2) of the Act and subsection 3501(1) of the Regulations. The official donation receipt will be for an amount equal to the fair market value of the Fund Shares on the particular transfer date. At all times, the Investor, the Partnership, Fundco and the registered charity will deal with each other on an arm's length basis.

14. The charity will subsequently redeem its Fund Shares.

Purpose of the proposed transactions

The purpose of the proposed transactions is to allow Investors, through an interest in the Partnership, to invest in Flow-Through Shares issued by the Resource Corporation, to allow Investors to convert their interests in the Partnership into Fund Shares that can be disposed of in the open market and to allow Investors to gift or donate their Fund Shares to charities.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our Rulings are as follows:

A. Provided that the renunciation as outlined in 10 above is made, CEE may be allocated to each Investor pursuant to subparagraph 96(1)(d)(i) of the Act.

B. Provided that the Flow-Through Shares are capital property to the Partnership, subsection 85(2) of the Act will apply to the transfer of Flow-Through Shares from the Partnership to Fundco as described in 12 above.

C. Provided that the Partnership distributes the Fund Shares to the Investors and winds up within 60 days of the rollover under subsection 85(2) of the Act, subsection 85(3) of the Act will apply to the transfer of the Fund Shares by the Partnership to the Investors as described in 12 above.

Comments

Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:

(a) the determination of the fair market value or adjusted cost base of any property referred to herein;

(b) the determination of arm's length between any of the parties referred to herein;

(c) the income tax implications of the donation described;

(d) the GST implications of any of the proposed transactions;

(e) whether property held by the Investors is held on income or capital account; and

(f) any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above.

The Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

Yours truly,

Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch