24 June 1992 Income Tax Severed Letter 9209485 - Non-resident Flow-through Shareholder CEE Deduction

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

SUBJECT: NON-RESIDENT FLOW-THROUGH SHAREHOLDER CEE DEDUCTION SECTION: 115(1), 3, 66.1(3)]

• 5- 920948 B. Rankin (613) 957-8974

June 24, 1992

Dear Sirs:

Re: Flow -through Share Deductions and Income Tax Act Section 3

This is in reply to your letter dated March 25, 1992 where you request our technical interpretation of certain matters related to the income tax treatment for Canadian exploration expense renounced to a non-resident flow-through shareholder.

An earlier technical interpretation expressed the Department's view that a flow-through share is a "source" of income for the shareholder. We confirm that for the purposes of paragraph 3(a) a flow-through share is a source of property income. However, when the share is held in conjunction with a business carried on by the owner, it would be a source of income from that business.

In computing income for the purpose of paragraph 3(a) of the Act, a Canadian resident shareholder may deduct renounced Canadian exploration expense to the extent permitted by subdivision e of the Act and in so doing may create a non-capital loss. If Canadian exploration expense is not attributable to a particular source of income, it would be eligible to be deducted pursuant to paragraph 3(c) of the Act and no non-capital loss could be created. We should also advise that a principal business corporation is required to deduct Canadian exploration expense in determining its income from the business, thus while the corporation may choose to deduct less than the maximum amount, pursuant to subparagraph 66.1(6)(b)(v) of the Act it's cumulative Canadian exploration expense would be reduced by the amount "deductible".

Where the flow-through share is owned by a non-resident of Canada and is not held in conjunction with a business carried out in Canada, the share would normally be a "source" for the purpose of determining the non- resident's income from property. Subsection 2(3) and section 115 of the Act require a non-resident of Canada to determine Part I tax on income specifically identified in section 115(1) of the Act. Alternatively, property income not covered by subsection 115(1) of the Act may be taxed under Part XIII. As a result, Canadian exploration expense renounced to the non-resident shareholder may only be claimed under the authority of paragraph 3(c) of Part I of the Act to the extent there is income for Can1adian tax purposes as described in section 115.

While we trust that our general comments are of assistance to you, we should advise that they do not constitute an advance income tax ruling and are accordingly not binding on the Department.

Yours truly,

A/Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate