6 October 1999 External T.I. 9922845 - ISSUANCE OF FLOW-THROUGH SHARES TO EMPLOYEES

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.

992284
XXXXXXXXXX Peter Lee
(613) 957-8977
Attention: XXXXXXXXXX

October 6, 1999

Dear Sirs:

Re: Issuance of Flow-Through Shares to Employees

This is in reply to your letter of August 10, 1999 wherein you have requested our opinions regarding the interpretation of subsection 66.3(4) and paragraph 110(1)(d) of the Income Tax Act (the "Act") in the context of issuance of "flow-through" shares by a corporation to certain of its employees.

We cannot provide the opinions as requested because it appears that this relates to a specific fact situation. With respect to contemplated transactions, we would be pleased to provide our opinions only in the context of an advance income tax ruling request. With respect to past transactions, please refer the matter to the relevant Tax Services Office. However, we would like to provide our general views in respect of issuance of "flow-through" shares to employees.

In a situation wherein an oil and gas exploration corporation has entered into an agreement with its arm's length employees whereby the corporation agrees to issue its "flow-through" shares to these employees for a specified consideration, upon such issuance, employment benefits will be recognized by each of these employees pursuant to paragraph 7(1)(a) of the Act. In this case, subsection 66.3(4) of the Act might apply to reduce the paid-up capital of these issued shares. Furthermore, subsection 66.3(3) of the Act would also apply to deem these shares to have been acquired by these employees at a cost to them of nil, notwithstanding that they would have paid the specified consideration for the shares.

An offsetting deduction of 1/4 of the above-noted benefits may be available to each of these employees under paragraph 110(1)(d) of the Act provided that the requirements under this paragraph are met, including the requirement that these shares must be prescribed shares within the meaning of this expression in section 6204 of the Income Tax Regulations (the "Regulations") at the time of their issuance. Subsection 66.3(4) of the Act would cause a reduction of paid-up capital when expenses are renounced under the flow-through-share provisions of the Act. In these circumstances, by virtue of subsection 66.3(4) of the Act and subparagraph 6204(1)(a)(v) of the Regulations, it is our view that these shares would not be considered as prescribed shares. Therefore, the paragraph 110(1)(d) deduction would not be available to these employees.

Our above-noted general views are not advance income tax rulings, and accordingly are not binding upon Revenue Canada pursuant to paragraph 22 of the Information Circular 70-6R3 dated December 30, 1996.

Yours truly,

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