2006 Ruling 2006-0212861R3 - Amendment to Flow-Through Share Agreement

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 certain amendments to a written agreement, pursuant to which shares intended to be flow-through shares were issued, can be made without resulting in the termination of that agreement.

Position: Yes.

Reasons: Based upon the nature of the amendments and the application of existing jurisprudence to the facts of this situation.

XXXXXXXXXX 2006-021286

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
(collectively referred to herein as the "Applicants")
Advance Income Tax Ruling

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

You have advised us that to the best of your knowledge and that of the responsible officers of each of the Applicants, none of the issues involved in this Ruling:

(i) is in an earlier tax return of any of the Applicants or a related person;

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

(ii) is under objection by any of the Applicants or a related person;

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

(iv) is the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The head office for each of the Applicants is located at XXXXXXXXXX. The XXXXXXXXXX Tax Services Office serves each of the Applicants, while the XXXXXXXXXX Tax Centre and the XXXXXXXXXX Tax Centre serve B Co. and the Investor, respectively.

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

Definitions

Unless otherwise stated, in this letter, the following terms and expressions have the meanings specified below:

"A Co" means XXXXXXXXXX, as described in paragraph 1;

"Act" means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended to the date hereof and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

"adjusted cost base" has the meaning assigned to that term by section 54 of the Act;

"Agreement" means the written "Flow-Through Subscription Agreement" between B Co and the Investor dated XXXXXXXXXX;

"B Co" means XXXXXXXXXX, as described in paragraph 2;

"C Co" means XXXXXXXXXX, as described in paragraph 3;

"CEE" means "Canadian exploration expense" as defined in subsection 66.1(6) of the Act;

"Commitment Amount" has the meaning assigned in paragraph 5;

"CRCE" means "Canadian renewable and conservation expense" as defined in subsection 66.1(6) of the Act in conjunction with subsection 1219(1) of the Regulations;

"CRA" means the Canada Revenue Agency;

"Excess Renunciation" has the meaning assigned in paragraph 11;

"flow-through share" has the meaning assigned by subsection 66(15) of the Act;

"Instrument" has the meaning assigned in paragraph 12;

"Investor" means XXXXXXXXXX, as described in paragraph 3 below;

XXXXXXXXXX;

"Opinion" means the opinion given by the Income Tax Rulings Directorate to B Co in a letter dated XXXXXXXXXX;

"Original Renunciation" has the meaning assigned in paragraph 8;

"principal-business corporation" has the meaning assigned by subsection 66(15) of the Act;

"prescribed share" means a share of the capital stock of a corporation which is a prescribed share pursuant to subsection 6202.1 of the Regulations for purposes of the definition of flow-through share in subsection 66(15) of the Act;

"Project" means the wind farm project to be constructed and operated by B Co near XXXXXXXXXX;

"Regulations" means the Income Tax Regulations;

"Shares" has the meaning assigned in paragraph 5;

"Supplier" means, collectively, XXXXXXXXXX;

XXXXXXXXXX;

"taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

"test wind turbine" has the meaning assigned by subsection 1219(3) of the Regulations; and
"2007 Renunciation" has the meaning assigned in paragraph 15.

Facts

1. A Co is a taxable Canadian corporation that was incorporated on XXXXXXXXXX and that is engaged in the development, acquisition, construction and ownership of wind energy projects in Canada. XXXXXXXXXX.

2. B Co is a taxable Canadian corporation that was incorporated on XXXXXXXXXX for the purpose of developing, constructing and operating the Project. B Co is a principal-business corporation.

The authorized share capital of B Co consists of an unlimited number of common shares and XXXXXXXXXX.

3. The Investor is a limited partnership XXXXXXXXXX. The Investor was established to XXXXXXXXXX invest XXXXXXXXXX in common shares of B Co. The fiscal period of the Investor ends on XXXXXXXXXX.

The general partner of the Investor is C Co, a taxable Canadian corporation XXXXXXXXXX.

4. XXXXXXXXXX Neither B Co nor any party with whom B Co. does not deal at arm's length for purposes of the Act owns any units of the Investor.

XXXXXXXXX , B Co acquired, under an assignment agreement with A Co for consideration consisting of cash and a promissory note, all of A Co's interest in the Project. In particular, B Co acquired the rights of A Co under a power purchase agreement with XXXXXXXXXX pursuant to which power generated by the Project is to be sold and the rights of A Co under a turbine supply agreement with the Supplier relating to the purchase of XXXXXXXXXX wind turbines for use in the Project.

5. Pursuant to the Agreement, the Investor subscribed for XXXXXXXXXX common shares of B Co (the "Shares") at a price of $XXXXXXXXXX per share. The aggregate subscription price of $XXXXXXXXXX (the "Commitment Amount") was paid by the Investor to B Co, in cash XXXXXXXXXX, on XXXXXXXXXX and the Shares were issued on that date. The Agreement is governed by the laws of XXXXXXXXXX (and the laws of Canada applicable therein).

XXXXXXXXXX.

6. B Co and the Investor intended that the Shares issued pursuant to the Agreement would constitute flow-through shares. In particular, under the Agreement B Co was required to incur, after the date of the Agreement and not later than XXXXXXXXXX, CEE (intended to be CRCE incurred in relation to the development of the Project) in an amount equal to the Commitment Amount. In addition, under the Agreement B Co was required to renounce, on or before XXXXXXXXXX in accordance with subsection 66(12.6) and 66(12.66) of the Act, an amount equal to the Commitment Amount in respect of such CEE to the Investor with an effective date of not later than XXXXXXXXXX.

The Agreement provides that B Co and the Investor may agree to amend it by way of an instrument executed in writing.

7. None of the Shares issued pursuant to the Agreement is a prescribed share.

8. B Co filed the prescribed form contemplated by subsection 66(12.68) of the Act in respect of the Agreement, XXXXXXXXXX, within the respective time limits for such filings.

In XXXXXXXXXX, B Co renounced, in accordance with subsection 66(12.6) and 66(12.66) of the Act, an amount in respect of CEE to the Investor equal to the Commitment Amount with an effective date of XXXXXXXXXX (the "Original Renunciation"). B Co also filed at that time the prescribed form contemplated by subsection 66(12.7) of the Act in respect of the renunciation.

The Investor allocated the amount of the above renunciation in respect of CEE to its limited partners at XXXXXXXXXX in proportion to the number of units of the Investor held by each limited partner on that date in accordance with its partnership agreement. The Investor filed the prescribed form contemplated by subsection 66(12.69) of the Act in respect of the above allocation in XXXXXXXXXX.

XXXXXXXXXX.

9. In XXXXXXXXXX , B Co submitted information regarding the Project to Natural Resources Canada, which completed a review of the Project from an engineering and scientific perspective, culminating in the issuance of the Opinion by the CRA to B Co. In the Opinion, based in part on the Project having a planned nameplate capacity of XXXXXXXXXX megawatts, the opinion was given that, provided various requirements were satisfied, each of XXXXXXXXXX wind turbines (to be installed at specified locations and each having a capacity of XXXXXXXXXX megawatts) would qualify as a test wind turbine in respect of the Project.

10. XXXXXXXXXX.

11. XXXXXXXXXX, B Co will not be able to install and bring into operation wind turbines, each of which was intended to be a test wind turbine forming part of the Project, by the end of 2006 in order that it could incur CRCE equal to the Commitment Amount (the shortfall being the "Excess Renunciation").

Proposed Transactions

12. The Agreement will be amended, under a written instrument (the "Instrument") executed by B Co and the Investor, to add Article XXXXXXXXXX, the principal terms of which will provide that:

(i) B Co will, in accordance with subsection 66(12.73) of the Act, reduce the Original Renunciation by the Excess Renunciation, before XXXXXXXXXX.

(ii) B Co will incur in XXXXXXXXXX expenditures that are CRCE in relation to the Project in an amount at least equal to the Excess Renunciation and will renounce to the Investor in respect of the CEE so incurred, pursuant to subsection 66(12.6) of the Act and with an effective date in XXXXXXXXXX that is after the date such CEE is incurred, an amount equal to the Excess Renunciation. Such renunciation is to be made by B Co before XXXXXXXXXX and B Co will file the prescribed form contemplated by subsection 66(12.7) of the Act in respect of such renunciation within the time limit for such filing.

XXXXXXXXXX The Instrument will be substantially in the form of the draft thereof dated XXXXXXXXXX which you submitted with your letter of that date.

It will be expressly acknowledged in the Instrument that:

(a) B Co and the Investor are varying the Agreement to permit B Co to incur CEE in 2007, and to renounce in respect thereof, an amount not less than the Excess Renunciation;

(b) the remaining provisions of the Agreement will remain in full force and effect, unamended; and

(c) no "Act of Termination", as defined in the Agreement, has occurred.

In your view, under the laws governing the Agreement described in paragraph 4 above, execution of the Instrument to implement the amendments described above in this paragraph would not result in the Agreement being terminated or discharged and replaced with a new agreement between the parties.

13. B Co will, in accordance with subsection 66(12.73) of the Act, file the statement contemplated by paragraph 66(12.73)(a) thereof before XXXXXXXXXX and will identify an amount equal to the Excess Renunciation as a reduction of the Original Renunciation to the Investor. XXXXXXXXXX.

14. XXXXXXXXXX, B Co will install such wind turbines, have them commissioned into service and will commence to utilize them to generate electricity for the testing program described in the Opinion (which is expected to be revised as contemplated in paragraph 18 below). It is anticipated that these wind turbines will become "available for use" (within the meaning of subsection 13(27) of the Act) by B Co before XXXXXXXXXX.

15. Before XXXXXXXXXX, B Co will renounce to the Investor an amount, not exceeding the Excess Renunciation, in respect of CEE (i.e., CRCE) incurred by it in XXXXXXXXXX (the "XXXXXXXXXX Renunciation"), with an effective date of not later than XXXXXXXXXX. The CRCE will have been incurred by B Co prior to the effective date of the XXXXXXXXXX Renunciation.

B Co will file the prescribed form contemplated by subsection 66(12.7) of the Act in respect of the XXXXXXXXXX Renunciation within the time limit for such filing. XXXXXXXXXX

16. The Investor will allocate the amount of CEE incurred by it as a result of the XXXXXXXXXX Renunciation to its limited partners at XXXXXXXXXX in proportion to the number of units of the Investor held by each particular limited partner on that date in accordance with its partnership agreement.

The Investor will file the prescribed form contemplated by subsection 66(12.69) of the Act in respect of the above allocation by XXXXXXXXXX.

Additional Information

17. As a result of the reduction of the Original Renunciation to the Investor pursuant to subsection 66(12.73) of the Act as described in paragraph 13 above, the CEE allocated by the Investor to its limited partners effective as of XXXXXXXXXX will need to be reduced by an amount, in aggregate, equal to the Excess Renunciation. C Co, in its capacity as general partner of the Investor, will discuss with the appropriate officials at the CRA the method of making the adjustments to the income tax returns of each of the limited partners of the Investor.

18. XXXXXXXXXX.

Purpose of the Proposed Transactions

19. XXXXXXXXXX . The Board of Directors and management of both C Co, the general partner of the Investor, and B Co consider that it is in the best interests of the limited partners of the Investor and B Co for B Co to proceed with the installation and operation of these wind turbines in XXXXXXXXXX and, if the results of the testing contemplated by paragraphs 1219(3)(d) and (f) of the Regulations are satisfactory, with the construction of the remainder of the Project thereafter.

Ruling Requested and 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 ruling is as follows:

The amendment of the Agreement as described in paragraph 12 above will not, in and by itself, result in a new agreement between B Co and the Investor for the purposes of determining whether the XXXXXXXXXX Renunciation by B Co to the Investor will be made pursuant to the Agreement.

For greater certainty, provided that:

i) none of the Shares is a prescribed share,

ii) the transactions described in paragraphs 12, 13, 15 and 16 above have been completed in the manner described therein,

iii) the income tax return of the limited partner has been, or is in the process of being, adjusted as contemplated in paragraph 17 above, and

iv) the Agreement has not terminated in accordance with Article XXXXXXXXXX thereto,

a limited partner of the Investor who is allocated (as described in paragraph 16 above) a portion of the CEE deemed to have been incurred by the Investor as a result of the XXXXXXXXXX Renunciation will be entitled to include, subject to section 66.8 of the Act, such amount in the computation of that limited partner's CEE at XXXXXXXXXX by reason of paragraph (h) of the definition of CEE and to include such amount in the computation of that limited partner's "cumulative Canadian exploration expense", as defined in subsection 66.1(6) of the Act, by reason of the description of A therein, at XXXXXXXXXX.

This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on the CRA provided that the proposed transactions contained in paragraphs 12 and 13 above are completed by XXXXXXXXXX.

This ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments thereto.

Other Comments

Except as expressly stated, our ruling does not imply acceptance, approval or confirmation of any income tax implications relating to the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly:

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

ii) whether any particular expense incurred, or to be incurred, by B Co in respect of the Project has qualified, or will qualify, as CRCE or CEE of B Co;

iii) whether a particular wind turbine may qualify as a test wind turbine forming part of the Project;

iv) the determination of whether any of the Shares may constitute a prescribed share; and

v) the income tax implications of any amendment to the Agreement other than that described in paragraph 12 above.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch