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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: Whether the look-back rule provided under subsection 66(12.66) applies to flow-through warrants exercised in a given fact situation.
Position: Yes.
Reasons: The requirements under subsection 66(12.66) are met.
2004-009499
XXXXXXXXXX Guy Goulet, CA, M.Fisc
(613) 957-9768
December 13, 2004
Dear Sir,
Subject: Paragraph 66(12.66)
This is in response to your letter of September 17, 2004 asking whether the exercise of a share purchase right ("warrant") is eligible for the "look-back rule" under section 66(12.66), in the Particular Situation described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Particular Situation:
The Particular Situation as you have presented it to us is as follows:
1. Holdco is a taxable Canadian corporation and is not a public corporation.
2. In October of a "particular year" (Year 1), Newco was incorporated. Holdco subscribed for 100 Class A common shares of the capital stock of Newco for $100, which represented 100% of the issued and outstanding shares of the capital stock of Newco.
3. Newco was a principal-business corporation, within the meaning of subsection 66(15), engaged in the oil and gas sector.
4. On December 1 of Year 1, pursuant to an issuance instrument, Newco issued to the public 1,000 Class B common shares coupled with a right to purchase one share each. The issue price was $1.10 per unit, being $1.00 for a Class B common share and $0.10 for a right to purchase one share. The total amount raised by Newco for this issue was $1,100. Each share purchase right entitled the holder to subscribe for one Class B common share of Newco's capital stock for $0.90 during the three month period ending March 31 of the year following the particular year (i.e. Year 2).
5. The Class B common shares of the capital stock of Newco and the share purchase rights that were issued satisfied the definition of "flow-through share" in subsection 66(15).
6. In January, February or March of Year 2, Newco renounced, in favour of the persons in respect of whom the 1,000 Class B common shares were issued on December 1 of Year 1, an amount on account of Canadian Exploration Expenses (CEE) or Canadian Development Expenses (CDE) equal to an aggregate amount of $1,100. That renunciation was made pursuant to the look-back rule in subsection 66(12.66).
7. On March 1 of Year 2, the 1000 share purchase rights were exercised by their holders. As a result, Newco issued 1,000 new Class B common shares of its capital stock at $0.90 per share for a total amount of $900.
8. In Year 2, Newco incurred CEE or CDE in an aggregate amount of not less than $1,100, being an amount equal to the proceeds of the issue of the 1,000 Class B common shares with share purchase rights issued on December 1 of Year 1. The expenses so incurred were subject to subparagraphs 66(12.66)(b)(i) to (iii) inclusive.
9. In January, February or March of the year following Year 2 (i.e., Year 3), Newco renounced, in favour of the persons to whom the 1,000 Class B common shares were issued on March 1 of Year 2, an amount on account of CEE or CDE equal in the aggregate to $900. That renunciation was made pursuant to the look-back rule in subsection 66(12.66).
10. In Year 3, Newco incurred CEE or CDE in an aggregate amount of at least $900, being an amount equal to the proceeds of the issue of the 1,000 Class B common shares issued on March 1 of Year 2. The expenses so incurred would be subject to subparagraphs 66(12.66)(b)(i) to (iii) inclusive.
You are of the view that under the definition of "flow-through share" in subsection 66(15), Newco was required to incur CEE or CDE during the period beginning on December 1 of Year 1 and ending 24 months after the end of the month that includes that date (i.e., December 31 of Year 3) in an aggregate amount at least equal to the amount received from the issuance of the 1,000 Class B common shares accompanied by a right to purchase shares, namely $1,100.
It is your position that, pursuant to subsections 66(12.66), 66(12.6) and 66(12.601), Newco could renounce in January, February or March of Year 2, for the benefit of the persons in respect of whom the 1,000 Class B Common Shares were issued on December 1 of Year 1, an amount on account of CEE or CDE that was incurred in Year 2. You indicated that under the look-back rule in subsection 66(12.66), the expenses so renounced would be deemed to have been incurred on the last day of Year 1 and the renunciation would be deemed to take effect on that day. As a result of such a renunciation, the deeming rules in subsection 66(12.61) would apply so that the persons in whose favour the 1000 Class B common shares were issued on December 1 of Year 1 would be deemed to have incurred CEE on the date the renunciation became effective, i.e., December 31 of Year 1, thereby providing them with a tax deduction for Year 1.
You are also of the view that the exercise of the share purchase rights on March 1 of Year 2 would trigger a new flow-through share agreement. In your view, as a result of this new agreement, Newco would be required to incur CEE or CDE during the period commencing March 1, Year 2 and ending 24 months after the end of the month that includes that date (i.e., March 31, Year 4) in an aggregate amount at least equal to the amount received on the issuance of the 1,000 Class B common shares issued on March 1, Year 2, i.e., $900.
Finally, you are of the view that, pursuant to subsections 66(12.66), 66(12.6) and 66(12.601), Newco could renounce in January, February or March of Year 3, in favour of the persons to whom the 1,000 Class B common shares were issued on March 1 of Year 2, an amount in respect of CEE or CDE that was incurred in Year 3. You indicated that under the look-back rule in subsection 66(12.66), the expenses so renounced would be deemed to have been incurred on the last day of Year 2 and the renunciation would be deemed to take effect on that day. As a result of such renunciation, the deeming rules in subsection 66(12.61) would apply so that the persons in whose favour the 1000 Class B common shares were issued on March 1 of Year 2 would be deemed to have incurred CEE on the date the renunciation became effective, i.e., on December 31 of Year 2, thereby providing them with a tax deduction for Year 2.
Your Question:
You would like confirmation of your interpretation of the relevant provisions of the Act as set out above, in particular, in relation to the exercise of the share purchase rights.
It appears to us that the situation described in your letter may be an actual situation involving taxpayers. The Canada Revenue Agency ("CRA") does not generally provide written opinions on proposed transactions otherwise than by way of advance ruling. Furthermore, it is the responsibility of the relevant Tax Services Office to determine whether completed transactions have received appropriate tax treatment. We can, however, offer the following general comments which may not be fully applicable in a particular situation.
Generally speaking, the question of whether the conditions for the application of subsections 66(12.66), 66(12.6) and 66(12.601) are satisfied in a particular situation is one that must be resolved after a full examination of all the relevant facts, circumstances and documents. Notwithstanding this, and assuming that the other conditions set out in the Act would be satisfied in the particular situation, particularly with respect to the filing of the prescribed forms, it appears to us that our interpretation of those paragraphs with respect to the particular situation would be the same as yours.
However, the CRA's position, that you referred to in your request regarding document number 9531266, is that the exercise of a right to purchase a flow-through share triggers a new flow-through share agreement and that a new "agreement in writing" is not required to satisfy the conditions for the application of the definition of "flow-through share" in subsection 66(15). As well, the CRA considers that the period referred to in paragraphs (a) and (b) of the definition of "flow-through share" in subsection 66(15) begins on the date of exercise of the right to purchase a flow-through share and ends 24 months after the end of the month that includes that date, unless the original written agreement relating to flow-through shares and share purchase rights (the "original agreement") provides for a shorter period. In such a case, the CRA is of the view that the original agreement should be amended to provide for a different time period, which would allow the issuing corporation a full 24 months to incur CEE or CDE as a result of the exercise of the right to purchase a flow-through share.
Finally, we are of the view that Part XII.6 tax would likely be payable in the Particular Situation based on the information provided.
These comments are not advance income tax rulings and do not bind the CRA in any particular situation.
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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