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.

Issue Sheet

941986 / 942090
A.A. Cameron
September 6, 1994
Representative:Felesky Flynn
Ken S. Skingle

Background:

This matter arose in the context of a request for a technical interpretation concerning the definition of "flow-through share" ("FTS") found in paragraph 66(15)(d.1) of the Act and the application of the provisions of subsection 49(3) thereof. The major elements of the "hypothetical" situation were as follows:

-A "principal-business corporation" (a "PBC"), within the meaning of paragraph 66(15)(h) of the Act, would offer "flow-through" special warrants ("Special Warrants") to members of the public whereby each Special Warrant would be acquired for a fixed subscription price ("Subscription Price") (e.g., $1.00 per Special Warrant) and would entitle the holder thereof to acquire one common share of the PBC, at no additional cost, on or before a specified expiry time (e.g., within one year of the date of issue of the Special Warrant).

-Any Special Warrants not exercised prior to the specified expiry time would be deemed to have been exercised at the expiry time without any further action on the part of the holder. Once a subscriber has tendered the Subscription Price for each Special Warrant acquired that subscriber will subsequently receive one common share for each Special Warrant upon the actual or deemed exercise of the Special Warrant.

-The proceeds of the sale of the Special Warrants would be released to the PBC upon the closing of the offering of the Special Warrants. The proceeds of the offering would be used by the PBC to incur "Canadian exploration expense" ("CEE") and "Canadian development expense" ("CDE") (within the meaning given such terms in paragraphs 66.1(6)(a) and 66.2(5)(a), respectively, of the Act) which the PBC will renounce to subscribers in accordance with the FTS provisions of the Act.

-Each common share would not be a "prescribed share" (within the meaning of either of sections 6202 or 6202.1 of the Regulations) for purposes of paragraph 66(15)(d.1) and otherwise would qualify as a FTS.

Issues

i)Would a Special Warrant constitute a FTS?

ii)Would "the consideration for which the share is to be issued", within the meaning of subparagraph 66(15)(d.1)(i) of the Act and "the consideration received by the corporation for the share", within the meaning of subparagraph 66(15)(d.1)(ii) of the Act, be the $1.00 Subscription Price paid by the subscriber to acquire each Special Warrant?

iii)Would the "period" of time referred to in subparagraphs 66(15)(d.1)(i) and (ii) of the Act commence on the date of entering into the agreement in writing for the issuance of the Special Warrants?

iv)Would a Special Warrant constitute an "option to acquire property" for the purposes of subsection 49(3) of the Act with such provision applying upon the exercise of a Special Warrant?

Positions Taken

i)Although the final determination as to whether a particular Special Warrant would qualify as a FTS would be a question of fact, a Special Warrant that is a right to have a share issued pursuant to an agreement in writing referred to in the preamble to paragraph 66(15)(d.1) of the Act and which meets the conditions set forth in subparagraphs 66(15)(d.1)(i) and (ii) of the Act would constitute a FTS. (See document EC4586 dated March 24, 1988 and E55907 dated May 2, 1988, both concerning options, for a discussion relevant to the issues raised herein.)

ii) &

iii)In the above hypothetical situation, provided that the agreement for the issuance of the Special Warrants constituted an "agreement in writing" (for the purposes of the FTS definition) under which the PBC is obligated to incur (and renounce to the subscriber) the expenses specified in the FTS definition and to issue its common shares to the subscriber, in our opinion the "period" referred to in subparagraphs 66(15)(d.1)(i) and (ii) of the Act would commence with the entering into of such agreement and the amount of the "consideration" for the purposes of such provisions would be equal to the Subscription Price.

iv)Given the "deemed" or mandatory exercise of the Special Warrant, it would be unlikely that a Special Warrant would constitute an "option to acquire property" for the purposes of subsection 49(3) of the Act. Even if such a right represented a capital property to the holder which constituted an "option to acquire property" such that the provisions of subsection 49(3) of the Act applied, the provisions of subparagraph 49(3)(b)(ii) thereof would not result in any amount being included in computing the cost to a purchaser of the common share acquired upon the exercise of such option. This result would arise since, where a right represented by a Special Warrant is found to constitute a FTS, the provisions of subsection 66.3(3) of the Act would operate to deem the cost of that right to be nil.

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