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.
992377
XXXXXXXXXX Peter Lee
(613) 957-8977
Attention: XXXXXXXXXX
October 14, 1999
Dear Sirs:
Re: Special Warrants for Flow-Through Shares and Bonus Shares
This is in reply to your request for a technical interpretation of paragraph 6202.1(2)(a) of the Income Tax Regulations (the "Regulations") in the context of a public offering of certain special warrants for flow-through common shares by a principal business corporation. We apologize for the delay in providing our reply.
The situation described in your letter appears to relate to a specific fact situation. To the extent that you require confirmation of the tax consequences of proposed transactions involving this specific situation, we bring to your attention Information Circular 70-6R3 dated December 30, 1996 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. Although we cannot provide any comments with respect to the specific fact situation described in your letter, the following general comments may be of assistance.
In a situation wherein special warrants are issued by an oil and gas exploration corporation to the public under an offering memorandum for a set price ($X) per special warrant, each warrant can be exercised by its holder to acquire a "flow-through" common share of the corporation without further payment of any kind.
Each of the special warrants which is not exercised by its holder is deemed to be exercised and is automatically converted into a flow-through common share of the corporation without further payment of any kind on the conversion date, which is the earlier of 150 days after the closing date of the offering or the fifth business day following the date of the issuance of the last of the receipts for a final prospectus in B.C., Alberta and Ontario. Pursuant to the special warrant subscription agreement, the corporation has agreed that if it does not obtain a receipt from the applicable provincial securities regulator for the flow-through common shares to be issued as qualified for resale within 150 days of the closing of the offering, the corporation would pay as a bonus to the special warrant holders one-tenth of a non flow-through common share of the corporation (the "bonus share") for each special warrant, to be issued forthwith after the 150th day after the closing of the offering.
It is our view that the obligation of the corporation to issue the bonus shares in the above-noted situation would not be considered as "excluded obligation" within the meaning of the expression in subsection 6202.1(5) of the Regulations. Each special warrant holder could be entitled to a flow-through common share and a one-tenth of a non flow-through common share of the corporation. In this case, it is our view that the consideration for the flow-through common shares and non-flow-through common shares to be issued by the corporation would be nil, and that paragraph 6202.1(2)(a) of the Regulations would not apply to these shares. However, it is also our view that paragraph 6202.1(1)(b) or/and (c) may apply, depending on the circumstances. Furthermore, if the exercise price is not nil, paragraph 6202.1(2)(a) of the Regulations could potentially apply if there is no allocation of the exercise price between the flow-through common shares and non-flow-through common shares.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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