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 a donation of flow-through shares constitutes a gift for income tax purposes.
Position: Yes, in this particular case
Reasons: Based on the facts and having regard to the caveats provided in the Ruling, it is our view that the donation would constitute a gift for income tax purposes and that the CEE and the investment tax credit renounced to the investor pursuant to the flow-through share financing will not constitute an advantage under the draft split-receipting rules.
XXXXXXXXXX , 2008
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above named taxpayers. We also acknowledge the information provided in subsequent correspondence and 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 taxpayers 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 the taxpayers or a related person;
(iii) is under objection by the taxpayers 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 to the taxpayers by the Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985, 5th Supplement, 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 relevant definitions, the facts, proposed transactions and the purpose of the proposed transactions is as follows:
a) "ACO" means XXXXXXXXXX .,
b) "CEE" means Canadian exploration expenses as defined in subsection 66.1(6),
c) "Charities" means Charity A, Charity B and Charity C, collectively,
d) "Charity A" means XXXXXXXXXX ,
e) "Charity B" means XXXXXXXXXX ,
f) "Charity C" means XXXXXXXXXX ,
g) "CRA" means the Canada Revenue Agency,
h) "Investor" means XXXXXXXXXX ,
i) "Exchange" means the XXXXXXXXXX ,
k) "Program" means the proposed transactions as described below,
l) "Promoter" means XXXXXXXXXX ,
m) "Regulations" means the Income Tax Regulations promulgated under the Act,
n) "Resource Issuer" means XXXXXXXXXX .,
o) "Security Buyer A" means XXXXXXXXXX ,
p) "Security Buyer B" means XXXXXXXXXX ,
q) "Security Buyer C" means XXXXXXXXXX ,
r) "Security Buyers" means Security Buyer A, Security Buyer B and Security Buyer C, collectively,
s) "Share" means a common share of the Resource Issuer as described in 13 below,
t) "Unit" means a unit consisting of one common share of the Resource Issuer and one-half non-flow-through share purchase warrant of the Resource Issuer, and
u) "Warrant" means a XXXXXXXXXX non-flow-through share purchase warrant of the Resource Issuer as described in 13 below.
1) The Promoter is a corporation incorporated under the Business Corporations Act (XXXXXXXXXX ). It is a "taxable Canadian corporation" as defined in subsection 89(1). Its tax services office is the XXXXXXXXXX TSO.
2) The Promoter is engaged in providing consulting services to philanthropists and charities. XXXXXXXXXX are the two shareholders of the Promoter with each holding 50% of the issued and outstanding voting shares of the Promoter. You advise that no one shareholder controls the Promoter.XXXXXXXXXX
3) The Promoter has applied for and received tax shelter identification number XXXXXXXXXX in respect of the Program in accordance with and pursuant to subsection 237.1(2).
4) ACO is a firm of XXXXXXXXXX . Its address is XXXXXXXXXX .
5) The Investor is an individual resident in Canada. The Investor's tax services office is the XXXXXXXXXX TSO. You advise that the Investor is not a trader or dealer in securities and does not hold securities as inventory.
6) The Resource Issuer is a "taxable Canadian corporation" and a "public corporation" as defined in subsection 89(1). It is a "principal-business corporation" as defined in subsection 66(15). The Resource Issuer has authorized capital of an unlimited number of common shares. As of XXXXXXXXXX , the issued and outstanding capital consisted of XXXXXXXXXX common shares. The common shares are listed on the Exchange.
7) Each Charity is a registered charity which is not a "private foundation" and is a "qualified donee" as described in subsection 149.1(1).
8) You advise that all of the participants in the proposed transactions deal with each other at arm's length.
9) The Resource Issuer intends to raise $XXXXXXXXXX through a private placement sale of XXXXXXXXXX flow-through units in the Resource Issuer. You advise that the Investor will subscribe for XXXXXXXXXX flow-through units under a subscription agreement. The remaining flow-through units will be offered to other subscribers. Since the offering is not subject to a minimum subscription level, the Investor may be the only subscriber to the offering.
10) The Resource Issuer will appoint ACO to offer the Units on a commercially reasonable efforts basis. ACO will charge the Resource Issuer a corporate finance fee of $XXXXXXXXXX and a cash commission of up to XXXXXXXXXX % of the gross proceeds from sales of Units under the offering. The Resource Issuer will reimburse ACO for ACO's expenses incurred pursuant to the offering, including legal fees, disbursements and taxes.
11) The Investor will open a managed account with ACO and deposit $XXXXXXXXXX to pay the subscription price for the Units of the Resource Issuer.
12) The Investor will not borrow the funds used to subscribe for the Units.
13) The Resource Issuer will enter into a subscription agreement directly with the Investor to issue the Units under the flow-through share offering. Pursuant to the subscription agreement, the subscription price will be $XXXXXXXXXX per Unit, consisting of one common share of the Resource Issuer and XXXXXXXXXX non-flow-through share purchase warrant. Each whole warrant will be exercisable at a price of $XXXXXXXXXX per common share within the first XXXXXXXXXX months following the closing of the offering and thereafter at an exercise price of $XXXXXXXXXX per common share for the second XXXXXXXXXX months following the closing of the offering. Of the subscription price, $XXXXXXXXXX will be allocated to the price of the Share and $XXXXXXXXXX will be allocated to the Warrant.
14) The Units will be issued pursuant to the subscription agreement. The subscription price for the Units will be paid from the funds deposited in the managed account with ACO. Once issued, the Shares (but not the Warrants) will be listed for trading on the Exchange.
15) You advise that each Share will be a "flow-through share" as defined in subsection 66(15). The Resource Issuer will renounce eligible CEE to the Investor pursuant to subsections 66(12.6) and (12.601). All attendant tax reporting and renunciation forms will be prepared and filed by the Resource Issuer in accordance with the Act and Regulations.
16) In the event that any of the CEE renounced to the Investor as described in 15 above qualifies as a "flow-through mining expenditure" within the meaning of subsection 127(9), the Investor will claim an investment tax credit to the extent provided for in subparagraph 127(5)(a)(i).
17) You advise that the Investor, the Charities, the Security Buyers and ACO will not be specified persons in respect of the Resource Issuer within the meaning of subsection 6202.1(5) of the Regulations.
18) While not obligated to do so, you advise that the Investor intends to donate all of his Units unconditionally to the Charities. Charity A, Charity B and Charity C will receive XXXXXXXXXX Units, XXXXXXXXXX Units, and XXXXXXXXXX Units, respectively.
19) The Investor will donate his Units to the Charities by Deed of Gift. Each Charity will open a managed account with ACO and the Investor will donate his Units by directing ACO to transfer the Units from the Investor's account to the respective Charity's account.
20) Each Charity will issue a donation receipt to the Investor equal to the fair market value of the Units donated to it.
21) You advise that the Charities have indicated that they do not want to retain the Units, but instead want to sell them to realize cash for their charitable purposes. The Security Buyers will make an offer to purchase the donated Units from the Charities. The Charities will sell their Units to the Security Buyers as follows:
Charity Security Buyer No. of Units
Charity A Security Buyer C XXXXXXXXXX
Charity B Security Buyer A XXXXXXXXXX
Charity B Security Buyer B XXXXXXXXXX
Charity C Security Buyer B XXXXXXXXXX
Charity C Security Buyer C XXXXXXXXXX
22) The price payable by the Security Buyers will be $XXXXXXXXXX per Unit, allocated as to $XXXXXXXXXX for the Share and $XXXXXXXXXX for the Warrant. ACO and the Security Buyers have negotiated this price at arm's length, without any direction or influence from the Investor, the Promoter or the Resource Issuer.
23) As consideration for having arranged the series of transactions, each Charity will pay a fee to the Promoter equal to XXXXXXXXXX % of the gross selling price of the Charity's Units sold to the Security Buyers.
24) You advise that the Charities have not given any undertaking and are not obliged in any way to sell the Units to the Security Buyers and the Security Buyers are under no obligation and have no right to acquire the Units from the Charities. The Charities can still participate in the Program if they choose not to sell the donated Units to the Security Buyers. If the Charities choose not to sell the Units to the Security Buyers for a period of XXXXXXXXXX days following the making of the offer referred to in 21 above (the "Expiration Date"), the Charities would have to pay compensation to the Promoter in an amount that is equal to XXXXXXXXXX % of the fair market value of the Shares as quoted on the Exchange on the closing of the Expiration Date.
25) You advise that no fees or commissions of any kind will be paid by or received by any participants in the proposed transactions other than those described in 10, 23 and 24 above.
26) You advise that all purchases, transfers and dispositions of the Units will comply with all applicable securities laws.
Purpose of the Proposed Transactions
27) Given the government initiatives to promote charitable giving by providing preferential tax treatment for gifts of publicly listed securities, the Program is intended to facilitate the gifting of publicly listed Canadian resource company shares, which generally are not highly liquid and therefore are not generally acceptable to charities. This in turn will promote philanthropy generally and the raising of funds by Canadian resource companies to finance mining exploration activities and provide a significant source of funds for charities to pursue their charitable activities.
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, we confirm that:
A. The Program will constitute a gifting arrangement pursuant to paragraph (a) of the definition of "gifting arrangement" and a tax shelter pursuant to paragraph (b) of the definition of "tax shelter" in subsection 237.1(1).
B. The donation of the Shares to the Charities by the Investor will not, in and by itself, preclude the Investor from deducting:
a. in the computation of the Investor's income for purposes of the Act, any CEE that the Investor would otherwise be entitled to deduct pursuant to subsections 66(12.61) and 66.1(3), or
b. in the computation of the Investor's tax otherwise payable under Part I of the Act, any investment tax credit that the Investor would otherwise be entitled to deduct pursuant to subsection 127(5).
C. Provided the parties to the Program deal at arm's length, neither the donation of the Shares to the Charities by the Investor nor the sale of the Shares by the Charities to the Security Buyers as described above will, in and by themselves, cause a Share issued by the Resource Issuer to be a prescribed share, within the meaning of subsection 6202.1 of the Regulations, for purposes of the definition of flow-through share in subsection 66(15).
D. An amount equal to the fair market value on the date of donation of the Units donated by the Investor to the Charities, as described in 19 above, will qualify as a gift for the purposes of the definition of "total charitable gifts" in subsection 118.1(1) provided an official receipt containing prescribed information is filed as required by subsection 118.1(2).
E. Provided that the Shares are capital property to the Investor, no portion of the capital gain arising from the disposition of the Shares, if any, resulting from the making of the gift to the Charities will be included in computing the Investor's taxable capital gain to the extent provided for in paragraph 38(a.1).
F. Participation in the Program, in and of itself, will not cause the Shares to not be considered capital property to the Investor within the meaning assigned to that term in section 54 if the Shares would otherwise be considered capital property to the Investor.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 and are binding, subject to the caveats noted below, on the CRA provided that the proposed transactions are completed before XXXXXXXXXX .
As stated in paragraph 20 of Information Circular 70-6R5, although the CRA does not provide advance income tax rulings on draft legislation, it will give non-binding technical interpretations. In this regard, provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the applicable amendments to the Act as set out in Bill C-10 which received Second Reading in the Senate on December 4, 2007, are enacted substantially as proposed, it is our opinion, subject to the caveats noted below, that the CEE and investment tax credit renounced to the Investor pursuant to the flow-through share financing will not constitute an "advantage" for the purposes of proposed subsection 248(32).
Nothing in this letter should be construed as implying that the CRA has agreed or reviewed:
a) the determination of the fair market value of the Shares or the Warrants. In this regard, we have indicated that the sales price received by the Charities from the sale of the Units to the Security Buyers as described in 22 above may not be representative of the fair market value of the Units at the time the Units are donated by the Investor to the Charities. It is the responsibility of the Charities to support that the amount reported on the donation receipt reflects the fair market value of the property donated to the Charities;
b) the determination of arm's length between any of the parties referred to herein;
c) any of the Shares issued by the Resource Issuer will be a flow-through share;
d) any of the expenses renounced by the Resource Issuer to the Investor will qualify as either a CEE or as a flow-through mining expenditure;
e) whether property held by the Investor 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.
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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