2009 Ruling 2009-0336261R3 - transferable warrants & 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.

Principal Issues: 1. whether transferable flow-through warrants qualify as FTS

Position: 1.if all conditions of definition in 66(15) met at the time warrant is exercised

Reasons: 1. based on proposed transactions "agreement in writing" and other required conditions will be met when warrant is exercised

XXXXXXXXXX 								2009-033626

XXXXXXXXXX , 2009

Dear. XXXXXXXXXX :

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.

You have advised that to the best of your knowledge and that of the taxpayer above, none of the issues contained herein:

a) is in an earlier return of the taxpayer 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 taxpayer or a related person;

c) is under objection by the taxpayer or a related person;

d) is before the courts; or

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

Definitions

In this letter, the following terms have the meanings specified:

a) "Act" means the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision in the Act, and the Income Tax Regulations thereunder are referred to as the "Regulations";

b) "Canadian exploration expense" ("CEE") has the meaning assigned to that expression under subsection 66.1(6);

c) "Corporation" means XXXXXXXXXX .;

d) "consideration" for the purposes of the definition of "flow-through share" in subsection 66(15) shall be the exercise price of $XXXXXXXXXX per common share paid to the Corporation upon exercise of the Series B Warrant as described in paragraph 5(ii) below;

e) "mineral resource" has the meaning assigned under subsection 248(1);

f) "flow-through share" has the meaning assigned under subsection 66(15);

g) "public corporation" has the meaning assigned under subsection 89(1);

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

i) "prescribed Canadian exploration and development overhead expense" has the meaning assigned under subsection 1206(4.2) of the Regulations;

j) "principal-business corporation" has the meaning assigned under subsection 66(15);

k) "taxable Canadian corporation" has the meaning assigned under subsection 89(1); and

l) XXXXXXXXXX

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

Facts

1. The Corporation is a taxable Canadian corporation and a public corporation. The Corporation is a principal-business corporation. Its tax account number is XXXXXXXXXX . It files its annual income tax return at the XXXXXXXXXX Taxation Center and deals with the XXXXXXXXXX Tax Services Office. The Corporation's address is:

XXXXXXXXXX

2. The fiscal period of the Corporation ends on XXXXXXXXXX

3. The authorized share capital of the Corporation consists of an unlimited number of common shares, of which XXXXXXXXXX are issued and outstanding. The common shares of the Corporation are listed on the XXXXXXXXXX under the ticker symbol "XXXXXXXXXX " and are widely held by the public.

4. The business of the Corporation consists solely of the exploration for mineral resources.

Proposed Transactions

5. The Corporation proposes to offer Series A Units and Series B Units as follows:

(i) the Series A Unit offering will consist of an offering of common shares and common share purchase warrants neither of which will be flow-through shares such that the Series A Unit offering will not raise any matters that are the subject of any ruling hereunder;

(ii) the Series B Unit offering will consist of an offering of Units at a price of $XXXXXXXXXX per Unit. Each Series B Unit will consist of one (1) common share (the "Unit Share") and one (1) transferable common share purchase warrant (the "Series B Warrant") which will enable the person exercising the Series B Warrant (the "Holder") in the manner described in more detail below to subscribe for a common share (the "Warrant Share") at a price of $XXXXXXXXXX for a period of XXXXXXXXXX years. The Corporation proposes to list the Series B Warrants for trading on the XXXXXXXXXX ;

(iii) pursuant to the subscription agreement (the "Subscription Agreement") to be entered into between the Corporation and a subscriber for Series B Units (the "Subscriber"), the Unit Shares issued pursuant to the Series B Unit offering will not be considered flow-through shares since the Corporation will not agree to incur and/or renounce any type of resource expenses to the Subscriber for any portion of the $XXXXXXXXXX purchase price payable for a Series B Unit that is allocated to the Unit Share. Pursuant to XXXXXXXXXX the Subscription Agreement, the Corporation intends to allocate $XXXXXXXXXX of the $XXXXXXXXXX subscription price payable for a Series B Unit to the Unit Share and $XXXXXXXXXX of the $XXXXXXXXXX subscription price payable for a Series B Unit to the Series B Warrant;

(iv) pursuant to the Subscription Agreement, the Corporation also will not agree to incur and/or renounce any type of resource expenses to the Subscriber in respect of the $XXXXXXXXXX portion of the $XXXXXXXXXX purchase price payable for a Series B Unit which is allocated to the Series B Warrant;

(v) pursuant to XXXXXXXXXX the Subscription Agreement, the Corporation and the Subscriber will agree that the Warrant Shares issuable to the Holder on the exercise of the Series B Warrants will be:

(a) issuable pursuant to a "Subscription and Renunciation Agreement"; and

(b) "flow-through shares" as defined in subsection 66(15);

"Subscription and Renunciation Agreement" is defined in XXXXXXXXXX the Subscription Agreement to mean the agreement entered into by a Holder and the Corporation on the exercise by the Holder of any Series B Warrant and is represented by the Warrant Certificate and the Subscription and Renunciation Form as described below in paragraphs (viii) and (x).

(vi) pursuant to XXXXXXXXXX the Subscription Agreement, the Corporation also will agree pursuant to the Subscription and Renunciation Agreement to:

(a) incur Canadian exploration expenses (as that term is defined in subsection 66.1(6) of the Act and that is eligible to be renounced pursuant to the look-back rule in subsection 66(12.66) of the Act) in an amount equal to the subscription price for the Warrant Shares during the period commencing at the time of exercise of the particular Series B Warrants and ending, at the latest, on XXXXXXXXXX of the year following the year in which the particular Series B Warrant was exercised; and

(b) renounce to the Holder such Canadian exploration expenses in accordance with subsection 66(12.66) of the Act with an effective date no later than XXXXXXXXXX of the year in which the particular Series B Warrant was exercised;

(vii) the Corporation will issue the Subscriber of Series B Units a common share certificate to evidence the Unit Share and a warrant certificate (the "Warrant Certificate") to evidence the Series B Warrant ;

(viii) pursuant to XXXXXXXXXX the Warrant Certificate, the Corporation will agree with any holder exercising the Series B Warrants and subscribing for Warrant Shares in accordance with the procedures set out in the Warrant Certificate that it will:

(a) incur Canadian exploration expenses (as that term is defined in subsection 66.1(6) of the Act and that is eligible to be renounced pursuant to the look-back rule in subsection 66(12.66) of the Act) in an amount equal to the subscription price for the Warrant Shares during the period commencing at the time of exercise of the particular Series B Warrants and ending, at the latest, on XXXXXXXXXX of the year following the year in which the particular Series B Warrant was exercised; and

(b) renounce to the Holder such Canadian exploration expenses in accordance with subsection 66(12.66) of the Act with an effective date no later than XXXXXXXXXX of the year in which the particular Series B Warrant was exercised;

(ix) pursuant to XXXXXXXXXX the Warrant Certificate, the Holder of the Warrant Certificate may only exercise the Series B Warrants and subscribe for the Warrant Shares by:

(a) completing the "Subscription and Renunciation Form" page which forms part of the Warrant Certificate; and

(b) providing the Corporation with the completed Warrant Certificate and a cheque in the amount of the exercise price of the Series B Warrants;

(x) pursuant to XXXXXXXXXX the Warrant Certificate and XXXXXXXXXX the Subscription and Renunciation Form, both the Corporation and the Holder will agree that upon execution of the Subscription and Renunciation Form by the Holder, the Warrant Certificate and the Subscription and Renunciation Form will evidence the "Subscription and Renunciation Agreement" which will be the entire agreement between the parties.

It is expressly acknowledged in the Warrant Certificate that the "Subscription and Renunciation Agreement" constitutes a binding obligation of the Corporation enforceable in accordance with its terms.

Purposes of the Proposed Transactions

6. The main purpose of the Series A Unit and Series B Unit offerings described above is to allow the Corporation to raise capital currently that can be used for general corporate purposes rather than solely for expenses that qualify as CEE.

7. The main purpose behind the proposed listing of the Series B Warrants forming part of the Series B Unit offering is to make the Series B Unit offering more attractive to persons such as non-residents of Canada and others who are interested in investing in the Corporation but who are not currently able to take advantage of the traditional flow-through of resource deduction benefits of flow-through shares. Certain potential investors have indicated to the Corporation that they would be more inclined to invest in the Corporation if such a listed transferable flow-through warrant incentive were added to the offering. In these times, with extremely poor capital markets for junior mining corporations, the Corporation is attempting to satisfy the demands of its potential investors.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

A. As described in paragraphs 5(ii) through 5(x) above, upon the exercise of the Series B Warrant by a Holder, the Subscription and Renunciation Agreement which is represented by a completed Warrant Certificate together with a corresponding completed Subscription and Renunciation Form will constitute an agreement in writing entered into between the Corporation and the Holder which will satisfy the requirements of paragraphs (a) and (b) of the definition of "flow-through share" in subsection 66(15).

B. Provided that

(i) the conditions in paragraphs 66(12.66)(d) and (e) are otherwise satisfied;

(ii) the Corporation is a principal-business corporation at all relevant times; and

(iii) the Warrant Shares are not prescribed shares,

Canadian exploration expenses as further described in paragraph 66(12.66)(b), incurred by the Corporation in the calendar year following the year the Subscription and Renunciation Agreement is entered into by the Corporation and the Holder will be deemed to have been incurred by the Corporation on the last day of the calendar year in which the Subscription and Renunciation Agreement was entered into in accordance with subsection 66(12.66).

C. Provided that

(i) the Corporation has complied with the conditions of subsection 66(12.68);

(ii) the Corporation is a principal-business corporation at all relevant times;

(iii) subsection 66(12.67) is not applicable; and

(iv) the Warrant Shares are not prescribed shares

and subject to the provisions of subsections 66(12.6)(a) to (e), Canadian exploration expenses incurred by the Corporation after the date the Subscription and Renunciation Agreement is entered into by the Corporation and the Holder in a particular calendar year and prior to the end of such calendar year, together with any amounts deemed to have been incurred pursuant to subsection 66(12.66) may be renounced by the Corporation to such Holder in accordance with subsection 66(12.6).

D. The proposed transactions in and by themselves would not cause the Warrant Shares to be considered prescribed shares.

E. Subsection 245(2) will not be applicable as a result of the proposed transactions in and by themselves to re-determine the tax consequences of the rulings given above.

Comments

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

(i) whether the Corporation is a principal-business corporation;

(ii) whether any particular expense incurred or to be incurred by the Corporation will qualify as CEE;

(iii) whether any particular expense incurred or to be incurred by the Corporation will constitute a prescribed Canadian exploration and development overhead expense;

(iv) the determination of whether the Warrant Shares will constitute prescribed shares;

(v) the reasonableness of the allocation of the $ XXXXXXXXXX subscription price payable for a Series B Unit as described in paragraph 5(iii); and

(vi) the computation of the adjusted cost base of the Series B Warrant to the Holder and the computation of the cost of the Warrant Share to the Holder and, in particular, the interaction of subsections 49(3) and 66.3(3) .

The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 issued by the Canada Revenue Agency (the "CRA") on May 17, 2002 and is binding on the CRA provided that the proposed transactions commence before XXXXXXXXXX .

These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto.

Opinion

Provided that our understanding of the facts and proposed transactions described herein is correct, and provided that the proposed changes to the definition of "flow-through share" in subsection 66(15) is enacted in the form proposed by Bill C-10, which received second reading in the Senate on December 4, 2007 and which subsequently expired on the Order Paper, it is our opinion that the Subscription and Renunciation Agreement which is represented by a completed Warrant Certificate together with the completion of the corresponding Subscription and Renunciation Form will continue to constitute an agreement in writing which will satisfy the requirements of paragraphs (a) and (b) of the definition of "flow-through share" in subsection 66(15).

The foregoing opinion is not a ruling and as noted in Information Circular 70-6R5 is not binding on the Canada Revenue Agency.

Yours truly,

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