2007 Ruling 2007-0242361R3 - Donation 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.

Principal Issues: Whether a donation of flow-through shares constitutes a gift for income tax purposes.

Position: Yes

Reasons: Based on the facts and having regard to the caveats provided in the Ruling, it is our view that the donation would constitute a gift for income tax purposes and that the CEE and the investment tax credit renounced to the donors pursuant to the flow-through share financing will not constitute an advantage under the draft split-receipting rules.

XXXXXXXXXX 						2007-024236

XXXXXXXXXX , 2007

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above named taxpayers. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling request:

A. is in an earlier return of the taxpayers or a related person;
B. is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayers or a related person;
C. is under objection by the taxpayers or a related person;
D. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
E. is the subject of a ruling previously issued to the taxpayers by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the relevant definitions, the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

a) "ACO" means XXXXXXXXXX,

b) "Advisor" means XXXXXXXXXX,

c) "Arrangement" means the proposed transactions as described below,

d) "CEE" means Canadian exploration expenses as defined in subsection 66.1(6), "Charities" means each charity listed in Schedule A, collectively,

e) "Charity" means each charity listed in Schedule A, individually,

f) "Corporation" means XXXXXXXXXX,

g) "CRA" means the Canada Revenue Agency,

h) "Donor" means each donor listed in Schedule B, individually,

i) "Donors" means each donor listed in Schedule B, collectively,

j) "Exchange" means the XXXXXXXXXX,

k) "Liquidity Provider" means XXXXXXXXXX,

l) XXXXXXXXXX,

m) "Regulations" means the Income Tax Regulations promulgated under the Act,

n) "Resource Company" means XXXXXXXXXX,

o) "Share" means a common share of the Resource Company as described in 13 below,

p) "Unit" means a unit consisting of one common share of the Resource Company and one-half non-flow through share purchase warrant of the Resource Company, and

q) "Warrant" means a one-half non-flow through share purchase warrant of the Resource Company as described in 13 below.

Facts

1) The Corporation was incorporated on XXXXXXXXXX under the Business Corporations Act (XXXXXXXXXX). It is a taxable Canadian corporation. Its tax services office is the XXXXXXXXXX TSO and its tax centre is the XXXXXXXXXX Tax Centre. It has a fiscal year ending on XXXXXXXXXX.

2) The Corporation is registered with the XXXXXXXXXX as a limited market dealer. It also carries on the business of providing consulting services to individual and corporate philanthropists and registered charities.

3) The Corporation has applied for and received tax shelter identification number XXXXXXXXXX in respect of the Arrangement in accordance with and pursuant to subsection 237.1(2).

4) The Donors are either individuals resident in Canada or Canadian-controlled private corporations.

5) The Resource Company is a taxable Canadian corporation and a public corporation. It is a principal-business corporation as defined in subsection 66(15). The Resource Company has authorized capital of an unlimited number of common shares. As at XXXXXXXXXX, the issued and outstanding capital consisted of XXXXXXXXXX common shares. The common shares are listed on XXXXXXXXXX the Exchange.

6) Each Charity is a registered charity which is not a "private foundation" and is a "qualified donee" as described in subsection 149.1(1).

7) The Advisor provides advisory services to the Resource Company. The Advisor is registered as a limited market dealer with the XXXXXXXXXX. The Liquidity Provider is a non-resident corporation. Its mailing address is XXXXXXXXXX.

8) You advise that all of the participants in the proposed transactions deal with each other at arm's length.

Proposed Transactions

9) The Resource Company intends to raise $XXXXXXXXXX through XXXXXXXXXX sequential non-brokered private placement sales of XXXXXXXXXX flow-through units in the Resource Company. You advise that the Donors will subscribe for XXXXXXXXXX flow-through units under a subscription agreement with a reference date of XXXXXXXXXX, and the remaining XXXXXXXXXX flow-through units will be offered to other subscribers who will not be participating in the Arrangement under a subscription agreement with a reference date of XXXXXXXXXX. The proceeds of the flow-through share offering will be used for exploration on its XXXXXXXXXX project in XXXXXXXXXX.

10) In accordance with its Advisory Agreement with the Resource Company, the Advisor has established the terms of the flow-through share offering, including the subscription price and premium over market trading price, with the Resource Company. The Advisor will earn a commission of XXXXXXXXXX% of gross funds raised and broker warrants representing XXXXXXXXXX% of the securities issued. The broker warrants are non-transferable and exercisable at a price of $XXXXXXXXXX per common share of the Resource Company for a period of XXXXXXXXXX years commencing from the closing date.

11) The Donors will deposit sufficient cash to pay the subscription price for XXXXXXXXXX Units in a trust account with ACO, the law firm acting for the Corporation.

12) The Resource Company will enter into subscription agreements directly with the Donors and other subscribers to issue the Units under the flow-through share offering. Pursuant to the subscription agreement, the subscription price will be $XXXXXXXXXX per Unit, consisting of one common share of the Resource Company and one-half non-flow through share purchase warrant. Each whole warrant will be exercisable at a price of $XXXXXXXXXX per common share within XXXXXXXXXX years from the date of closing. The price allocated per Share will be $XXXXXXXXXX and $XXXXXXXXXX will be allocated to the Warrant.

13) The Units will be issued pursuant to the subscription agreements. The subscription price for the Units issued to the Donors will be paid from the funds deposited in the trust account with ACO. The Donors will not borrow the funds used to subscribe for the Units. Once issued, the Shares (but not the Warrants) will be listed on the Exchange.

14) You advise that each Share will be a "flow-through share" as defined in subsection 66(15). The Resource Company will renounce eligible CEE to the Donors and other subscribers pursuant to subsections 66(12.6) and (12.601). All attendant tax reporting and renunciation forms will be prepared and filed by the Resource Company in accordance with the Act and Regulations. In the event that any of the CEE renounced to a Donor as described in 15 above qualifies as a "flow-through mining expenditure" within the meaning of subsection 127(9), such Donor will claim an investment tax credit to the extent provided for in subparagraph 127(5)(a)(i).

15) You advise that the Donors, the Charities, the Advisor and the Liquidity Provider will not be specified persons in respect of the Resource Company within the meaning of subsection 6202.1(5) of the Regulations.

16) While not obligated to do so, you advise that each Donor intends to donate all of the Donor's Units unconditionally to the Donor's respective Charity as follows:

	Donor 			Charity 		No. of Units
	
	XXXXXXXXXX 			XXXXXXXXXX 		XXXXXXXXXX

The Donors will donate their Units to their Charity by Deed of Gift. They will convey the Units by directing the transfer agent to register the certificates for the Units in the name of the Charities. Each Charity will issue a donation receipt to the respective Donor equal to the fair market value of the Shares and Warrants donated.

17) You advise that the Charities have indicated that they do not want to retain the Shares or the Warrants, but instead want to sell them to realize cash for their charitable purposes. Independent of the flow-through share offering (and without the knowledge of the Corporation), the Liquidity Provider was negotiating with the Resource Company about making a strategic investment. The Liquidity Provider proposed to purchase common shares from treasury at a price less than $XXXXXXXXXX per share (which was within the trading range for common shares at that time). As part of its advisory services, the Advisor suggested that the Liquidity Provider purchase the Shares instead, since that would result in the Resource Company receiving more cash through the flow-through offering than a private placement of common shares from treasury. The Corporation had some ancillary involvement in establishing the sale price, acting on behalf of the Charities to maximize their return. The price payable by the Liquidity Provider will be $XXXXXXXXXX per Unit, allocated as to $XXXXXXXXXX for the Shares and $XXXXXXXXXX for the Warrant.

18) You advise that none of the Charities has given any undertaking or is obliged in any manner to sell the Shares or Warrants to the Liquidity Provider. A Charity can still participate in the Arrangement if it chooses not to sell the donated Units to the Liquidity Provider. If a Charity wished to hold the donated Units and sell them later (either within the hold period of XXXXXXXXXX months from the date of closing to another accredited investor, or after the hold period into the market), the Charity would have to pay the Corporation its XXXXXXXXXX% fee as described in 21 below based on that ultimate sale price. However, since by holding the donated Units, the Charity takes on the risk of changing prices, you advise that no Charity is likely to assume the price risk and will sell the Units to the Liquidity Provider.

19) As consideration for having arranged the series of transactions, the Charities will pay a fee to the Corporation equal to XXXXXXXXXX% of the gross selling price of any Units sold to the Liquidity Provider.

20) You advise that all purchases, transfers and dispositions of the Units will comply with all applicable securities laws.

Other Information

21) You advise that the Liquidity Provider will acquire the Units as a strategic investment. This holding will represent less than XXXXXXXXXX % of the outstanding shares of the Resource Company. Independent of the flow-through share offering, an affiliate of the Liquidity Provider, XXXXXXXXXX, has entered into an "off-take" agreement with the Resource Company XXXXXXXXXX. The "off-take" agreement is conditional on completion of a final sales contract and a final decision to develop the project.

Purpose of the Proposed Transactions

22) The purpose of the proposed transactions is to allow donors to respond to the recently announced government initiatives designed to encourage philanthropy by providing preferential tax treatment for gifts of publicly traded shares to charitable organizations. However, notwithstanding that flow-through shares may be publicly traded, there may not be an active market so that charitable organizations cannot convert the shares received as donations into readily available cash. Under the proposed transactions, the Liquidity Provider, with regard to its own independent objectives, will purchase the Shares and Warrants donated to the Charities so that they can convert the gift in kind into funds which can be applied for their charitable purposes.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, we confirm that:

A. The Arrangement will constitute a gifting arrangement pursuant to paragraph (a) of the definition of "gifting arrangement" and a tax shelter pursuant to paragraph (b) of the definition of "tax shelter" in subsection 237.1(1).

B. The donation of the Shares to a Charity by a Donor will not, in and by itself, preclude the Donor from deducting:

a. in the computation of the Donor's income for purposes of the Act, any CEE that the Donor would otherwise be entitled to deduct pursuant to subsections 66(12.61) and 66.1(3), or

in the computation of the Donor's tax otherwise payable under Part I of the Act, any investment tax credit that the Donor would otherwise be entitled to deduct pursuant to subsection 127(5).

C. Provided the parties to the Arrangement and in particular the Resource Company and the Liquidity Provider deal at arm's length, neither the donation of the Shares to the Charity by a Donor nor the sale of the Shares to the Liquidity Provider as described above will, in and by themselves, cause a Share to be a prescribed share, within the meaning of subsection 6202.1 of the Regulations, for purposes of the definition of flow-through share in subsection 66(15).

D. An amount equal to the fair market value on the date of donation of the Shares and Warrants donated by each individual Donor to the Donor's respective Charity, as described in 18 above, will qualify as a gift for the purposes of the definition of "total charitable gifts" in subsection 118.1(1) provided an official receipt containing prescribed information is filed as required by subsection 118.1(2).

E. An amount equal to the fair market value on the date of donation of the Shares and Warrants donated by each corporate Donor to its respective Charity, as described in 18 above, will qualify as a gift under paragraph 110.1(1)(a) provided an official receipt containing prescribed information is filed as required by subsection 110.1(2).

F. Provided that the Shares are capital property to a Donor, no portion of the capital gain arising from the disposition of the Shares, if any, resulting from the making of the gift to the Charity will be included in computing the Donor's taxable capital gain to the extent provided for in paragraph 38(a.1).

G. Participation in the Arrangement, in and of itself, will not cause the Shares to not be considered capital property to a Donor within the meaning assigned to that term in section 54 if the Shares would otherwise be considered capital property to the Donor.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 and are binding, subject to the caveats noted below, on the CRA provided that the proposed transactions are completed before XXXXXXXXXX.

Opinion

As stated in paragraph 20 of Information Circular 70-6R5, although the CRA does not provide advance income tax rulings on draft legislation, it will give non-binding technical interpretations. In this regard, provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the applicable amendments to the Act as set out in Bill C-10 as passed by the House of Commons on October 29, 2007, are enacted substantially as proposed, it is our opinion, subject to the caveats noted below, that the CEE and investment tax credit renounced to the Donors pursuant to the flow-through share financing will not constitute an "advantage" for the purposes of proposed subsection 248(32).

Caveats

Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed:

a) the determination of the fair market value of the Shares or the Warrants. In this regard, we have indicated that the sales price received by the Charities from the sale of the Units to the Liquidity Provider as described in 19 above may not be representative of the fair market value of the Units at the time the Units are donated by the Donors to the Charities. It is the responsibility of the Charities to support that the amount reported on the donation receipt reflects the fair market value of the property donated to the Charities;

b) the determination of arm's length between any of the parties referred to herein;

c) any of the Shares issued by the Resource Company will be a flow-through share;

d) any of the expenses renounced by the Resource Company to a Donor will qualify as either a CEE or as a flow-through mining expenditure for the purposes of Ruling B;

e) whether property held by the Donors is held on income or capital account; and

f) any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above.

Yours truly,

XXXXXXXXXX
Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

XXXXXXXXXX