30 January 2004 External T.I. 2003-0047271E5 - Flow-through shares

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: What is the taxable capital of a corporation that acquires all the shares of another corporation after the end of its last taxation year and winds up the other corporation before the issuance of the flow-through shares?

Position: The taxable capital of the corporation does not include the taxable capital employed in Canada of the other corporation if the other corporation ceases to exist before the issuance of the flow-through shares.

Reasons: Under subsection 66(12.6011) the taxable capital of the corporation would only include the taxable capital employed in Canada of the other corporation if the corporations were associated at the time the flow-through shares were issued.

XXXXXXXXXX 2003-004727
Luisa A. Majerus
January 30, 2004

Dear XXXXXXXXXX:

Re: Application of Subsection 66(12.6011)

This is in response to your letter of November 5, 2003 wherein you requested our views on whether subsection 66(12.6011) of the Income Tax Act (the "Act") applies to require the taxable capital amount employed in Canada of one corporation's ("B Co.") to be added to the taxable capital of another corporation ("A Co.") in the circumstances outlined below.

You have described the following hypothetical situation:

A Co. and B Co. are both Canadian public corporations. At their December 31, 2002 year-ends, the taxable capital amount of each of A Co. and B Co. is $10,000,000 ($20,000,000 in total). On December 31, 2002, there is no relationship between A Co. and B Co. On October 15, 2003, A Co. acquires 100% of the shares of B Co. by way of cash take-over bid for $6,000,000. On October 31, 2003, B Co. is wound up into A Co., B Co.'s assets are distributed to A Co. and B Co. is dissolved. On November 15, 2003, A Co. enters into agreements to issue flow-through shares to subscribers.

Subsection 66(12.601) of the Act allows the renunciation of specified Canadian development expenses to holders of flow-through shares if the issuing corporation's taxable capital amount is not more than $15,000,000 at the time the consideration for the issuance of the flow-through shares was given.

Subsection 66(12.6011) of the Act states that, for the purpose of subsection 66(12.601), a particular corporation's taxable capital amount at any time is the total of

(a) its taxable capital employed in Canada for its last taxation year that ended more than 30 days before that time, and

(b) the total of all amounts each of which is the taxable capital employed in Canada of another corporation associated at that time with the particular corporation for the other corporation's last taxation year that ended more than 30 days before that time.

Pursuant to paragraph 66(12.6011)(a), A Co.'s taxable capital amount is equal to its taxable capital employed in Canada for its last taxation year that ended more than 30 days before the flow-through share issue (December 31, 2002), being $10,000,000 plus any amount computed under paragraph 66(12.6011)(b). In our view, provided B Co. has been dissolved (i.e., ceased to exist) prior to the time the consideration for the flow-through shares is given, B Co will not be associated with A Co. at the relevant time and, therefore, the amount computed under paragraph 66(12.6011)(b) will be nil.

Yours truly,

Daryl Boychuk, LL.B
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch