4 December 1989 Income Tax Severed Letter 5-8481 - Flow-through shares and subsection 85(1) of the Income Tax Act

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.

Dear Sirs:

This in reply to your letter dated July 28, 1989, wherein you requested our opinion with regards to the interrelationship of the flow-through share provisions of the Act and an election pursuant to subsection 85(1) of the Act.

You provided us with the following scenario:

• 1. All of the parties are Canadian corporations.
• 2. Corporation A agrees to contribute certain Canadian resource properties together with related tangible equipment to Corporation B.
• 3. The price is determined by negotiation between these arm's length parties and settled on an amount of $100.
• 4. Corporation B agrees to issue as consideration, an agreed number of its common shares and to enter into the appropriate agreements, file the prescribed forms, etc. so that the shares will be flow-through shares for purposes of paragraph 66(15)(d.1) of the Act.
• 5. Corporation A and Corporation B further agree that, on the transfer of property, an election pursuant to subsection 85(1) of the Act will be made and that the elected amount in respect of the Canadian resource properties will be $1.00 and the appropriate amount in respect of tangibles will be the least amount which may be elected pursuant to the provisions of subsection 85(1) of the Act.

Specifically, you want to know whether this transaction in some fashion breaches the flow-through share rules and would disqualify any renunciation of expenses by Corporation B to Corporation A or, alternatively whether the rollover of properties from Corporation A to Corporation B will for some reason not result in proceeds of disposition at the elected amounts as set out in the proposed election pursuant to subsection 85(1) of the Act.

While we are unable to provide confirmation of the tax effects in a hypothetical situation, we do offer the following general comments for your assistance.

Commentary

It is possible to structure a flow-through share arrangement in conjunction with a rollover of property to a principal-business corporation by issuing flow-through shares (the "Shares") pursuant to section 85 of the Act, so that neither paragraph 66(15)(d.1) of the Act nor subsections 66(12.6), (12.62) and (12.64) of the Act are contravened. There is no requirement that the consideration given to a resource corporation for the Shares be property used to incur resource expenditures. The consideration for which the Shares are issued will be valued at its fair market value at that time.

A taxpayer, for example, may roll a Canadian resource property to a corporation pursuant to subsection 85(1) of the Act for an agreed amount of $1. If the value of the property is $1,000, the consideration given for the flow-through shares, would be $1,000, enabling the taxpayer to enter into a flow-through share agreement with the issuing corporation under which the issuing corporation would renounce resource expenditures to the taxpayer in an amount equal to $1,000.

The fact that the cost base of the Shares pursuant to subsection 85(1) of the Act would otherwise be a negligible amount has little impact on the investor since subsection 66.3(3) of the Act applies by deeming the Shares to have a cost of nil.

It should be noted that the above arrangement would not work should the corporation wish to make use of expenses incurred in the first sixty days of the year pursuant to subsection 66(12.66) of the Act, since in that situation the consideration paid for the flow-through shares must be money as specified at paragraph c of that subsection.

The above comments are only expressions of opinion and as such should not be construed as advance income tax rulings, nor are they binding on the Department.