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 a flow-through share agreement satisfies the requirements of subsection 66(12.68) of the Act if it does not specify the number of shares to be issued.
Position: Yes.
Reasons: There is no requirement that a flow-through share agreement specify the number of shares to be issued unless it is a "selling instrument" within the meaning of subsection 66(15) of the Act.
July 15, 1998
Employer Services Resource Industries
Other Programs Section
A. Seidel
Attention: Jane Turpin (613) 957-8974
980980
Flow-through Share Subscription Agreement
This is in reply to your facsimile dated April 15, 1998 in which your requested our comments with respect to whether or not the proposed flow-through share subscription agreement (hereinafter referred to as the “FTS Agreement”) to be entered into by XXXXXXXXXX satisfies the requirements of subsection 66(12.68) of the Income Tax Act (the “Act”) even though it does not specify the number of flow-through shares to be issued by XXXXXXXXXX.
The definition of "flow-through share" in subsection 66(15) of the Act requires that a share be issued to a person by a principal-business corporation "under an agreement in writing (emphasis added) entered into ... after February 1986, under which the corporation agrees for consideration that does not include property ...
a) to incur, in the period that begins on the day the agreement was made and ends 24 months after the end of the month that includes that day, Canadian exploration expenses or Canadian development expenses in an amount not less than the consideration for which the share is to be issued, and
b) to renounce, ... the Canadian exploration expenses or Canadian development expenses so incurred by it not exceeding the consideration received by the corporation for the share, ...".
Pursuant to subsection 66(12.68) of the Act, “a corporation that agrees to issue or prepares a selling instrument in respect of flow-through shares shall file with the Minister a prescribed form together with a copy of the selling instrument or agreement to issue the shares ...”. The expression “selling instrument” is defined in subsection 66(15) of the Act to mean “a prospectus, registration statement, offering memorandum, term sheet or other similar document that describes the terms of the offer (including the price and number of shares) pursuant to which a corporation offers to issue flow-through shares”.
The FTS Agreement includes the following terms in section 2 with respect to the advance of funds:
“XXXXXXXXXX ...”
and that
“XXXXXXXXXX .”
In those situations where XXXXXXXXXX does make advances to XXXXXXXXXX, the FTS Agreement provides that the advances shall be allocated as follows:
“ XXXXXXXXXX
XXXXXXXXXX,”
Section 3 of the FTS Agreement provides that XXXXXXXXXX agrees to incur Canadian exploration expenses (“CEE”) and/or Canadian development expenses (“CDE”) “in an amount equal to or lower than the 1998 Advances” received from XXXXXXXXXX and that it will issue flow-through shares, at a price of $XXXXXXXXXX per share, in an amount equal to the amount of CEE/CDE actually incurred, ie. the amounts described in XXXXXXXXXX above. However, there is no provision in the FTS Agreement which specifies the total number of shares to be issued pursuant thereto.
Although a “selling instrument” must identify the number of shares to be issued pursuant thereto, there is no similar provision in the Act that requires a flow-through share agreement which is not a “selling instrument” to specify the number of shares to be issued pursuant to the agreement. It is our view that the FTS Agreement submitted by XXXXXXXXXX would not be a “selling instrument” within the meaning of subsection 66(15) of the Act. Accordingly, even though it does not specify the number of shares to be issued thereunder, the FTS Agreement submitted by XXXXXXXXXX would satisfy the requirements of subsection 66(12.68) of the Act such that an identification number can be assigned to the prescribed form filed with the FTS Agreement.
If you wish to discuss any of the above, or if we can be of any further assistance, please contact the writer.
Manager
Resource Industries Section
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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