22 February 1996 External T.I. 9604945 - TIMING OF FLOW-THROUGH SHARE ISSUE

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:

Whether flow-through shares can be issued after the exploration expenses have already been incurred.

Position:

Yes, provided there is a valid agreement between the shareholder and the corporation, as required in the definition of flow-through share in subsection 66(15), prior to the expenditures being incurred.

Reasons:

Subsections 66(12.6), 66(12.62) and 66(12.64) permit the corporation to choose the "effective date" of a renunciation. Once the flow-through shares have been paid for and issued, the corporation can renounce any of the expenses incurred in the relevant taxation year and prior to the "effective date" of the renouncement.

		960494
XXXXXXXXXX                                A. Seidel
                                          (613) 957-8974
Attention:  XXXXXXXXXX

February 22, 1996

Dear Sirs:

Re: Flow-through Shares

This is in reply to your letter dated February 5, 1996, in which you requested our views with respect to the determination of whether shares that are issued after the exploration expenditures have been incurred but prior to the expenditures being renounced would qualify as flow-through shares, as defined in subsection 66(15) of the Income Tax Act (the "Act"), and whether the entire amount of resource expenses stipulated in a flow-through share agreement must be incurred in order for any renunciation under that agreement to be valid.

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 subsections 66(12.6), 66(12.62) and 66(12.64) of the Act which may be of some assistance.

The definition of flow-through share in subsection 66(15) of the Act requires that a share be issued to a person under an agreement in writing and subsections 66(12.6), (12.62) and (12.64) of the Act require that the person must have given consideration under the agreement to the corporation issuing the flow-through share. Paragraphs 66(12.6)(d), (12.62)(d) and (12.64)(c) of the Act limit the amount that may be renounced by a corporation to a flow-through shareholder to the amount of consideration received for the shares. No amount can be renounced by a corporation until the person acquiring the flow-through shares has paid for them. Once the corporation has received payment for, and has issued, the flow-through shares, then the corporation may, pursuant to subsections 66(12.6), (12.62) or (12.64) of the Act, as the case may be, renounce any of the expenses incurred in the relevant taxation year and before the "effective date" in that year to the flow-through shareholder. This would also be the case where the effective date is prior to the date of the payment for, and the issuance of, the flow-through shares.

It is generally our view that the mere fact that a corporation incurs less than the maximum amount of resource expenses stipulated in a flow-through share agreement would not adversely affect the renunciations otherwise available under subsections 66(12.6), (12.62) or (12.64) of the Act, as the case may be, in respect of any flow-through shares actually issued provided that all of the following conditions are satisfied:

(a)the flow-through share agreement requires the corporation to incur a specified maximum amount of resource expenses on a "best efforts" basis;

(b)the corporation incurs the resource expenses on a "best efforts" basis;

(c)the fact that the corporation incurs less than the maximum amount of resource expenses stipulated in the agreement does not affect the agreement's enforceability in any way;

(d)the actual amount of the total resource expenses incurred results in a return of unexpended funds and a corresponding decrease in the total number of flow-through shares that will be issued by the corporation; and

(e)the fact that the corporation incurs less than the maximum amount of resource expenses stipulated in the agreement does not result in a change in the price of each of the flow-through shares already issued or the amount of resource expenses to be renounced for each such share already issued.

These comments are provided in accordance with the guidelines set out in paragraph 21 of IC 70-6R2 and are therefore not binding on Revenue Canada.

Yours truly,

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