8 February 2000 External T.I. 1999-0014275 - Cost 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.

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: Does a share remain a "flow-through share" having a cost of nil where the "24 month" period for renunciation of expenses in respect of that share has expired without any such renunciation having occurred?

Position: Yes.

Reasons: Expiry of the above period is not relevant to the qualification of the share as a flow-through share under the definition of "flow-through share" contained in subsection 66(15) . In addition, there is no provision of the Act which overrides or reverses the deeming provisions of subsection 66.3(3).

								993234
XXXXXXXXXX 							A.A. Cameron
(613) 347-1361
Attention:	XXXXXXXXXX 

February 8, 2000

Dear Sirs:

Re: Flow-Through Shares

We are writing in response to your letter regarding the definition of the term "flow-through share" ("FTS") found in subsection 66(15) of the Income Tax Act (the "Act") as well as the provisions of subsection 66.3(3) thereof. As subsequently requested, we are enclosing a copy of the above letter for your files.

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 tax services office. To the extent that you require confirmation with respect to proposed transactions involving specific taxpayers, a request for an advance income tax ruling should be made. 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 Information Circular 70-6R3 dated December 30, 1996 ("IC 70-6R3"). Nevertheless, we can provide you with the following general comments with respect to the definition of FTS as well as the provisions of subsection 66.3(3) of the Act which may be of some assistance.

Our Comments

Pursuant to the definition of the term FTS contained in subsection 66(15) of the Act, a share in the capital stock of a "principal-business corporation" (a "PBC"; also as defined in that subsection) may qualify as a FTS where it is issued to a person under an agreement in writing, entered into between the person and the PBC, under which the PBC agrees:

i) to incur, within a specified time period, qualifying expenses in an amount not less than the consideration for which the share is to be issued, and

ii) to renounce, within another specified time period and in prescribed form, an amount in respect of those qualifying expenses so incurred by it not exceeding the consideration received by the PBC for the share.

As such, a share issued by a PBC may qualify as a FTS regardless of whether the PBC actually incurs or renounces qualifying expenses. In other words, where a PBC has issued a share to a person under an agreement in writing in circumstances where the share qualifies as a FTS, the fact that the PBC has not made any renunciations in respect of that share would not cause the share to cease to be a FTS. (Of course, in order for the PBC to be able to renounce an amount to the person in respect of the share under subsection 66(12.6) of the Act it must incur qualifying expenses within the relevant time period.)

Where a PBC has issued a FTS to a person pursuant to an agreement in writing between such parties, the provisions of subsection 66.3(3) of the Act apply to deem that person to have acquired such share at a cost of nil. Accordingly, any amount subsequently received by the shareholder as proceeds of disposition will result in a capital or income gain to the shareholder, depending upon the circumstances.

If the PBC and the shareholder were to subsequently enter into a new agreement whereby the FTS previously issued are cancelled and replaced by newly issued shares, it is our view that such agreement would not result in a change to the shareholder's cost of the FTS previously determined under subsection 66.3(3) of the Act. In addition, while it would be a question of fact whether the newly issued shares would qualify as FTS, it should be noted that even if those shares so qualified, the "24 month" period relevant to those new shares would not commence until the day the subsequent agreement was made. As such, expenses incurred by the PBC prior to that date could not qualify for renunciation by the PBC to the shareholder in respect of such new shares.

You have asked whether any "administrative relief" would be available in a situation where the PBC is unable to renounce the relevant expenses and given that the cost of the FTS would remain nil. We are not aware of such relief having been provided, however, since that question relates to an administrative matter you may wish to contact your local tax services office with regard to same.

In accordance with paragraph 21 of IC 70-6R3, the comments contained herein are not income tax rulings and are not binding on the Canada Customs and Revenue Agency.

Yours truly,

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

Att.