4 February 2004 External T.I. 2003-0045931E5 - Flow-through shares - CCA and CRCE

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.

Principal Issues: Whether CCA can be renounced to investors in flow-through shares.

Position: No, however, certain costs that constitute CRCE and would otherwise form part of the cost of depreciable property may potentially be renounced to investors in flow-through shares.

Reasons: As provided in the definition of CRCE in subsection 1219 of the Regulations.

2003-004593
XXXXXXXXXX A.A. Cameron
(613) 347-1361
February 4, 2004

Dear XXXXXXXXXX:

Re: Flow-Through Share Program

We are writing further to your letter of October 22, 2003 with regard to the above program and capital cost allowance ("CCA"). In particular, you have asked that we confirm "that CCA deductions are not eligible for flow through to investors" who acquire a flow-through share ("FTS"), as defined in subsection 66(15) of the Income Tax Act (the "Act").

Our Comments

Under the above-mentioned definition of FTS, amounts may be renounced to investors in respect of certain "Canadian exploration expense" ("CEE"), as defined in subsection 66.1(6) of the Act or certain "Canadian development expense" ("CDE"), as defined in subsection 66.2(5) of the Act. However, subject to the limited exception discussed below, the Act precludes an expense relating to the cost of depreciable property from being included in these expense pools. The term "depreciable property" is defined in subsection 13(21) of the Act and, essentially, encompasses property in respect of which CCA may be claimed.

The exception relates to certain "Canadian renewable and conservation expenses" ("CRCE"), as defined in subsection 66.1(6) of the Act, which are renounceable as CEE. These expenses are set out in subsection 1219(1) of the Income Tax Regulations and include expenses for: the construction of a temporary access road to the project site; clearing land to the extent necessary to complete the project; process engineering for the project; the drilling or completion of a well for the project; and certain test wind turbines relating to a wind farm project.

With respect to your concerns that the current legislation places the solar energy industry in an unfavourable position, we are forwarding a copy of your letter, along with our response, to the Department of Finance. The Department of Finance is responsible for all matters relating to tax policy and the drafting of tax legislation. If you wish to express your concerns directly to the Department of Finance, you should contact:

Mr. James Greene

Chief, Resource and Environmental Taxation Section
Business Income Tax Division
Department of Finance Canada
140 O'Connor Street
Ottawa, ON
K1A 0G5

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch

c.c.: James Greene
Department of Finance