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 renounced to the donor pursuant to the flow-through share financing will not constitute an advantage under the draft split-receipting rules.
XXXXXXXXXX 2008-026928
XXXXXXXXXX , 2008
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
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:
A. is in an earlier return of the taxpayers or a related person;
B. 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;
C. is under objection by the taxpayers or a related person;
D. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
E. 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 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:
Definitions
a) "ACO" means XXXXXXXXXX
b) "Arrangement" means the proposed transactions as described below,
c) "CEE" means Canadian exploration expenses as defined in subsection 66.1(6),
d) "Charities" means Charity A and Charity B, collectively,
e) "Charity A" means XXXXXXXXXX ,
f) "Charity B" means XXXXXXXXXX ,
g) "CRA" means the Canada Revenue Agency,
h) "Donor A" means XXXXXXXXXX ,
i) "Donor B" means XXXXXXXXXX ,
j) "Donor C" means XXXXXXXXXX ,
k) "Donors" means Donor A, Donor B and Donor C, collectively,
l) "Exchange" means the XXXXXXXXXX ,
m) "Liquidity Provider A" means XXXXXXXXXX ,
n) "Liquidity Provider B" means XXXXXXXXXX
o) "Liquidity Provider C" means XXXXXXXXXX ,
p) "Liquidity Provider D" means XXXXXXXXXX ,
q) "Liquidity Provider E" means XXXXXXXXXX ,
r) "Liquidity Providers" means Liquidity Provider A, Liquidity Provider B, Liquidity Provider C, Liquidity Provider D, and Liquidity Provider E, collectively,
s) "Promoter" means XXXXXXXXXX .,
t) "Regulations" means the Income Tax Regulations promulgated under the Act,
u) "Resource Company" means XXXXXXXXXX .,
v) "Share" means a common share of the Resource Company as described in 13 below,
w) "Unit" means a unit consisting of one common share of the Resource Company and one-half non-flow through share purchase warrant of the Resource Company, and
x) "Warrant" means a one-half non-flow through share purchase warrant of the Resource Company as described in 13 below.
Facts
1) The Promoter was incorporated under the Business Corporations Act (XXXXXXXXXX ) on XXXXXXXXXX . It is a "taxable Canadian corporation" as defined in subsection 89(1). Its address is XXXXXXXXXX . The Promoter's tax services office is the XXXXXXXXXX TSO. It has a fiscal year ending on XXXXXXXXXX
2) The Promoter provides fundraising and related services to individual and corporate philanthropists and registered charities.
3) The Promoter has applied for and received tax shelter identification number XXXXXXXXXX in respect of the Arrangement in accordance with and pursuant to subsection 237.1(2).
4) ACO is an investment dealer in Canada and a member of the Investment Dealers Association. Its address is XXXXXXXXXX .
5) The Donors are "Canadian-controlled private corporations" as defined in subsection 125(7). You advise that the Donors are not traders or dealers in securities and do not hold securities as inventory.
6) The Resource Company is a "taxable Canadian corporation" and a "public corporation" as defined in subsection 89(1). XXXXXXXXXX It is a "principal-business corporation" as defined in subsection 66(15). The Resource Company has authorized capital of an unlimited number of common shares. As at 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 the Liquidity Providers are independent parties which will acquire the Units in the ordinary course of their business. The Liquidity Providers were identified by ACO.
9) You advise that all of the participants in the proposed transactions deal with each other at arm's length.
Proposed Transactions
10) The Resource Company intends to raise $XXXXXXXXXX through a private placement sale of XXXXXXXXXX flow-through units in the Resource Company. You advise that the Donors will subscribe for XXXXXXXXXX of the 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 Donors may be the only subscribers to the offering.
11) The Resource Company will appoint ACO to offer the Units on a commercially reasonable efforts basis. ACO will charge a cash commission of XXXXXXXXXX % of the gross proceeds from sales of Units under the offering, plus share purchase options representing XXXXXXXXXX % of the Units sold. The share purchase options will be exercisable at a price of $XXXXXXXXXX per common share of the Resource Company for a period of XXXXXXXXXX months commencing from the closing date. In connection with the offering and other services provided to the Resource Company, ACO will also receive from the Resource Company a corporate finance fee of $XXXXXXXXXX (plus GST).
12) The Donors will open a non-discretionary brokerage account with ACO and will deposit sufficient cash to pay the anticipated subscription price for the Units.
13) The Resource Company will enter into subscription agreements directly with the Donors 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 Company and one-half non-flow through share purchase warrant. Each whole warrant will be exercisable at a price of $XXXXXXXXXX per common share for a period of 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 price of the Warrant.
14) The Units will be issued pursuant to the subscription agreement. The subscription price for the Units issued to the Donors will be paid from the funds deposited with ACO. The Donors will not borrow the funds used to subscribe for the Units. Once issued, the Shares (but not the Warrants) will be listed on the Exchange.
15) You advise that each Share will be a "flow-through share" as defined in subsection 66(15). The Resource Company will renounce eligible CEE to the Donors and other subscribers pursuant to subsections 66(12.6) and (12.601). All attendant tax reporting and renunciation forms will be prepared and filed by the Resource Company in accordance with the Act and Regulations.
16) You advise that the Donors, the Charities, ACO and the Liquidity Providers will not be specified persons in respect of the Resource Company within the meaning of subsection 6202.1(5) of the Regulations.
17) While not obligated to do so, you advise that each Donor intends to donate all of its Units unconditionally to its respective Charity. Donor A will donate XXXXXXXXXX Units to Charity A, Donor B will donate XXXXXXXXXX Units to Charity B, and Donor C will donate XXXXXXXXXX Units to Charity A.
18) The Donors will donate their Units to their Charities by Deed of Gift. They will convey the Units by directing the transfer agent to register the certificates for the Units in the name of the Charities. Each Charity will issue a donation receipt to the respective Donor equal to the fair market value of the Units donated to it. You advise that the receipt will contain the information required by subsection 3501(1) of the Regulations.
19) 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 Liquidity Providers will make an offer to purchase all of the donated Units from the Charities.
20) Charity A will sell XXXXXXXXXX Units to Liquidity Provider A, XXXXXXXXXX Units to Liquidity Provider B, and XXXXXXXXXX Units to Liquidity Provider E. Charity B will sell XXXXXXXXXX Units to Liquidity Provider C and XXXXXXXXXX Units to Liquidity Provider D. The price payable by the Liquidity Providers will be $XXXXXXXXXX per Unit, allocated as to $XXXXXXXXXX to the Share and $XXXXXXXXXX to the Warrant. ACO and the Liquidity Providers have negotiated this price at arms' length, without any direction or influence from the Donors, the Promoter or the Resource Company. The Charities will direct the transfer agent to register the certificates for the Units in the name of the Liquidity Providers.
21) As consideration for having arranged the series of transactions, the Charities will pay a fee to the Promoter equal to XXXXXXXXXX % of the gross selling price of the Units sold to the Liquidity Providers.
22) You advise that none of the Charities has given any undertaking or is obliged in any way to sell the Units to the Liquidity Providers and none of the Liquidity Providers is under obligation or has a right to acquire the Units from the Charities. A Charity can still participate in the Arrangement if it chooses not to sell the donated Units to the Liquidity Provider. If a Charity wished to hold the donated Units and sell them later (either within the hold period of XXXXXXXXXX months from the date of closing to another accredited investor, or after the hold period into the market), the Charity would have to pay the Promoter a fee as described in 21 above based on that ultimate sale price. However, since by holding the donated Units, the Charity takes on the risk of changing prices, you advise that no Charity is likely to assume the price risk and will sell the Units to the Liquidity Provider.
23) You advise that no fees, commissions, or compensation of any kind will be paid by or received by any participants in the proposed transactions other than those described in 11, 21 and 22 above.
24) You advise that all purchases, transfers and dispositions of the Units will comply with all applicable securities laws.
Purpose of the Proposed Transactions
25) The purpose of the proposed transactions is to allow the Donors to respond to the government initiatives designed to encourage philanthropy by providing preferential tax treatment for gifts of publicly traded shares to charitable organizations. However, notwithstanding that flow-through shares may be publicly traded, there may not be an active market so that charitable organizations cannot convert the shares received as donations into readily available cash. Consequently, Liquidity Providers have been found to purchase the Units donated to the Charities so that they can convert the gift in kind into funds which can be applied for their charitable purposes.
Rulings Given
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 Arrangement 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 a Charity by a Donor will not, in and by itself, preclude the Donor from deducting in the computation of the Donor's income for purposes of the Act, any CEE that the Donor would otherwise be entitled to deduct pursuant to subsections 66(12.61) and 66.1(3).
C. Provided the parties to the Arrangement and in particular the Resource Company and the Liquidity Providers deal at arm's length, neither the donation of the Shares to the Charity by a Donor nor the sale of the Shares to a Liquidity Provider as described above will, in and by themselves, cause a Share 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 each Donor to its respective Charity, as described in 17 and 18 above, will qualify as a gift under paragraph 110.1(1)(a) provided an official receipt containing prescribed information is filed as required by subsection 110.1(2).
E. Provided that the Shares are capital property to a Donor, no portion of the capital gain arising from the disposition of the Shares, if any, resulting from the making of the gift to the Charity will be included in computing the Donor's taxable capital gain to the extent provided for in paragraph 38(a.1).
F. Participation in the Arrangement, in and of itself, will not cause the Shares to not be considered capital property to a Donor within the meaning assigned to that term in section 54 if the Shares would otherwise be considered capital property to the Donor.
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 .
Opinion
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 renounced to the Donors pursuant to the flow-through share financing will not constitute an "advantage" for the purposes of proposed subsection 248(32).
Caveats
Nothing in this letter should be construed as implying that the CRA has agreed to 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 Liquidity Providers as described in 20 above may not be representative of the fair market value of the Units at the time the Units are donated by the Donors 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 Company will be a flow-through share;
d) any of the expenses renounced by the Resource Company to a Donor will qualify as CEE for the purposes of Ruling B;
e) whether property held by the Donors 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.
Yours truly,
XXXXXXXXXX
Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2008
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2008
Email this Content