17 July 1995 External T.I. 9507845 - FLOW THROUGH SHARES

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.

		950784
XXXXXXXXXX                	Peter Lee
(613) 957-8977

Attention: XXXXXXXXXX

July 17, 1995

Dear Sirs:

Re: Technical Interpretation Regarding Flow-Through Share

This is in reply to your letter of March 20, 1995, wherein you requested our comments on the timing of payments of consideration for issuance of "flow-through share" and the timing of incurrence of Canadian exploration expenses. You also requested our comments on the tracing of these payments to the incurrence of these expenses. We apologize for the delay in replying to you.

In a hypothetical situation, an investor (the "Investor") entered into an agreement in writing on August 1, 1994 with a natural resource company ("ResourceCo") which qualifies as a principal business corporation within the meaning of the expression under subsection 66(15) of the Income Tax Act (the "Act"), and which incurred expenses that qualified as Canadian exploration expense ("CEE") within the meaning of the expression under subsection 66.1(6) of the Act during the period from August 1 to December 31, 1994. Pursuant to the terms of the agreement, ResourceCo agreed for cash consideration to incur CEE during the period from August 1 to December 31, 1994 in an amount not less than the cash consideration for which shares of ResourceCo were issued to the Investor. ResourceCo also agreed to renounce with an effective date of December 31, 1994 an amount of CEE incurred by it during that period not exceeding the cash consideration. These shares of ResourceCo are not prescribed shares under the provisions of section 6202 or 6202.1 of the Income Tax Regulations and were fully paid and issued on December 15, 1994. In order to finance the exploration program, ResourceCo borrowed money from a bank on August 2, 1994 and used the money for the purposes of exploration and repaid the loan on December 15, 1994 using the cash proceeds from issuance of these shares.

Our Comments

In the above-noted hypothetical situation, provided that other requirements in subsection 66(12.6) and in the definition of flow-through share under subsection 66(15) of the Act have been met and that the agreement is enforceable and legally binding, it is our view that the shares of ResourceCo issued to the Investor would not be disqualified as flow-through shares for the purposes of subsections 66(15) and 66(12.6) of the Act solely because:

(a) the cash consideration for the shares were paid to ResourceCo by the Investor after the agreement was entered into;

(b) the CEE was incurred before the cash consideration for the shares were given to ResourceCo by the Investor; or

(c) the direct use of the cash proceeds from issuance of the shares was to repay the loan (the proceeds from such loan were previously used to incur the CEE).

We hope that our above-noted comments are helpful to you. These comments represent our general views on the subject matter. As indicated in paragraph 21 of Information Circular 70-6R2, these comments do not constitute an advance income tax ruling and accordingly are not binding on the Department.

Yours truly,

A/Chief
Resource Industries Section
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch