7 February 1996 External T.I. 9603955 - ACB OF 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.

Principal Issues:
	Is the ACB of a flow-through share still nil after 	it no longer qualifies as a flow-through share?

Position:

yes.

Reasons:
	There is no provision in the Act which overrides or 	reverses the deeming provision in subsection 	66.3(3) of the Act.

		960395
XXXXXXXXXX              	A. Seidel
(613) 957-8974
Attention:  XXXXXXXXXX

February 7, 1996

Dear Sirs:

Re: Flow-Through Shares

This is in reply to your facsimile dated January 19, 1996, concerning the application of subsection 66.3(3) of the Income Tax Act (the "Act").

The situation described in your letter appears to relate to specific taxpayers and an actual fact situation. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your local Taxation Services Office. To the extent that you require confirmation of the tax consequences of proposed transactions, we bring to your attention Information Circular 70-6R2 ("IC 70-6R2") dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers should be the subject of a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can provide you with the following general comments with respect to the application of subsection 66.3(3) of the Act which may be of some assistance.

In the situation where a principal-business corporation has issued flow-through shares to a person, subsection 66.3(3) of the Act applies to deem that person to have acquired such shares at a cost of nil. The expressions "principal-business corporation" and "flow-through share" have the meanings assigned by subsection 66(15) of the Act. Accordingly, any amount subsequently received by the shareholder as proceeds of disposition will result in a capital or income gain to the shareholder, depending on the circumstances. Furthermore, in the situation where the corporation and the shareholder subsequently enter into an agreement which allows the corporation to use all of the proceeds of the flow-through share issue for non-qualifying expenditures such that the issued shares would cease to qualify as "flow-through shares", it is our view that such an agreement does not result in a change to the shareholder's cost of the flow-through share previously determined pursuant to subsection 66.3(3) of the Act. We will, however, bring this matter to the attention of the Department of Finance for their consideration.

These comments are provided in accordance with the guidelines set out in paragraph 21 of IC 70-6R2.

Yours truly,

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch