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.
Question
20. If an issuer of flow-through shares fails to spend and renounce the whole of the subscription price for the flow-through shares on qualifying expenditures, it is common to provide under the subscription agreement that the issuer must refund the unspent proceeds and/or pay damages to the subscriber in respect of the failure to provide the expected tax deductions. Will such provisions cause the shares to be "prescribed shares" having particular regard to paragraph 6202.1(1)(c) of the Income Tax Regulations?
Answer
20. We reiterate our answer to this question which was asked in Question 7 at the 1990 Roundtable (Canadian Petroleum Tax Journal, Fall 1990, page 141):
Provided the issuer agrees to pay damages to the subscriber only to the extent of any additional tax payable by the subscriber as a consequence of a reduction of the expected tax deductions pursuant to subsection 66(12.73) of the Income Tax Act, it is our view that such an indemnity would not cause any issued shares to be prescribed shares within the meaning of section 6202.1 of the Regulations.
It is also our view that where no shares have been issued in respect of any unspent proceeds, the issuer agrees to refund such proceeds to the subscriber, and the price of any shares subsequently issued will not be reduced because of the refund, such an indemnity would not cause the prescribed share rules to apply.
If there is any concern about this answer in a particular fact situation, the Resource Industries Section of Rulings would be pleased to examine a ruling request on the matter.
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