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.
Principal Issues:
Will a Special Warrant qualify as a flow-through share as defined in paragraph 66(15)(d.1)?
Position TAKEN:
Yes, provided it constitutes a right of the type referred to in the postamble to the FTS definition. Where the terms require a "deemed" exercise of the Special Warrant it would not likely constitute an "option" for the purposes of subsection 49(3).
Reasons FOR POSITION TAKEN:
Wording of the FTS definition. Warrants and options have previously been accepted as potentially qualifying as FTS in accordance with an earlier legal opinion.
941986 / 942090
XXXXXXXXXX A.A. Cameron
Attention: XXXXXXXXXX
September 6, 1994
Dear Sirs:
Re: Special Warrants
This is in reply to your letters of August 4 and 16, 1994 wherein you requested technical interpretations, firstly, concerning the definition of "flow-through share" ("FTS") contained in paragraph 66(15)(d.1) of the Income Tax Act (the "Act"), and secondly, concerning the application of the provisions of subsection 49(3) of the Act, in the context of the same hypothetical situation. As you are aware, your first letter was forwarded to the Rulings Directorate for reply by Mr. Jack Hoye of the Specialized Audit Programs Section of the Audit Directorate.
Unless otherwise stated, all references to the Act are to the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993.
The major elements of the hypothetical situation you have described are 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") 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.
-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. In other words, 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 would 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 Income Tax Regulations (the "Regulations") for purposes of paragraph 66(15)(d.1) and otherwise would qualify as a FTS.
You have requested that we confirm your conclusions that:
(i)A Special Warrant will qualify as a FTS throughout the period from the date of issue of the Special Warrant until the conversion or exchange to a Common Share. In addition, the Common Share received on the conversion will continue to constitute a FTS following the conversion.
(ii)At all times "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, will be the Subscription Price paid by the subscriber to acquire each Special Warrant.
(iii)The "period" of time referred to in subparagraphs 66(15)(d.1)(i) and (ii) of the Act will commence on the date of entering into the agreement in writing for the issuance of the Special Warrants.
(iv)A Special Warrant would constitute an "option" for the purposes of subsection 49(3) of the Act and that such provision would apply upon the exercise of a Special Warrant.
We are unable to provide the requested confirmations since the final determination with respect to the issues raised therein would have to be made with reference to all of the relevant facts of a particular situation involving Special Warrants, e.g., with reference to the documents, agreements, etc., concerning the offering of the Special Warrants and the related issuance of common shares. We will provide you with the following general comments which may be of assistance to you; however, our comments should not be construed as confirming the income tax consequences which would arise in a particular situation.
It is our view that, under the post-amble to paragraph 66(15)(d.1) of the Act, 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 (such a right being a "Right") would constitute a FTS.
For the purposes of subsections 66(12.6) and (12.62) of the Act (concerning the renunciation of CEE and CDE, respectively), the share referred to is the FTS as defined in paragraph 66(15)(d.1) of the Act which includes a Right. Therefore, expenses may be renounced with respect to a Right that is a FTS for the period commencing with the date the agreement to issue the Right was entered into. Generally, the amounts of any such renunciations cannot exceed the consideration paid for the Right. However, 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 referred to above under which the PBC is obligated to incur (and renounce to the subscriber) the expenses specified in such 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.
In our opinion, in a situation involving a "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. In any case, 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.
It would also be a question of fact whether other provisions of the Act would apply in a particular situation involving the sale of Special Warrants, e.g., whether the provisions of subsection 245(2) of the Act would apply to alter the "tax consequences" resulting from the transactions in question or whether the shares to be issued would constitute "prescribed shares" pursuant to the Regulations.
The foregoing comments represent our general views with respect to the above subject matter. As indicated in paragraph 21 of Information Circular 70-6R2, the above comments do not constitute an advance income tax ruling and accordingly are not binding on the Department.
Yours truly,
A/Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Policy and Legislation Branch
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