Administrative Policy
2003 Ruling 2003-000724 -
Various series of shares of a mutual fund corporation are redeemable by their holders for the net asset value per class, and are exchangeable for shares of another class that had the same net asset value but represent a different investment opportunity. This exchange right does not cause the shares to be prescribed under Regulation 6202.1.
Subsection 6202.1(1)
Cases
The Queen v. Jes Investments Ltd., 2007 DTC 5608, 2007 FCA 337
An exploration company ("Deena") that entered into an agreement styled as a flow-through share agreement with the taxpayer failed to incur any Canadian exploration and development expenses so that its purported renunciation of such expenses was invalid, and went into receivership. The shares issued were found to be prescribed shares in light of a provision in the agreement providing:
"The Corporation hereby agrees to indemnify and save harmless the Subscriber from and against any liability loss, damage or expense which the Subscriber may sustain or incur arising out of or in any way connected with the expenditure of the Subscription Amount."
See Also
Furukawa v. The Queen, 99 DTC 474 (TCC), aff'd 2000 DTC 6669 (FCA)
Various "sweeteners" provided by the issuer of what otherwise would be flow-through shares, namely, lifetime playing privileges and a building lot at a proposed golf course, and shares in another company, were items that a reasonable person would have very little expectation of getting and would attach little significance to and, in fact, did not appear to influence the taxpayer's decision to purchase the shares. Accordingly, they did not represent a return of consideration paid for the shares.
Rip TCJ. noted (at p.478) that "the term 'reasonably' implies an objective, rather than a subjective, examination of the facts."
In the Court of Appeal, Evans J.A. stated (at para. 41) that such objective standard
does not include benefits of very little intrinsic economic value or those that are in fact unlikely ever to be provided.
Administrative Policy
2012 Ruling 2012-0466731R3 - Donation of flow-through shares
Donors (mostly Canadian-resident individuals) as well as non-donors use cash to subscribe for flow-through shares of a listed Canadian resource company, pursuant to a subscription agreement entered into by a dealer as their agent (the Agent), so that Canadian exploration expenses will be renounced to the subscribers.
The Donors issue directions to the Agent to transfer a portion (the Donated Shares) of their shares to the account of the relevant registered charity, which issues a charitable receipt. Independent persons (the Liquidity Providers) agree to purchase the Donated Shares for their fair market value from the charities. The Liquidity Providers also agree to purchase the balance of the Donors' shares (the Sale Shares) for their fair market value.
The charities receiving Donated Shares will pay a financial services fee to the Agent for its services in selling the Donated Shares to the Liquidity Providers; and Donors who sell Sale Shares will also pay a financial services fee to the Agent for its services in selling those shares to the Liquidity Providers. Mr. X, who is not a Donor, will also sell his shares on the same terms.
Rulings include:
- the sale of a Donated Share to the Liquidity Providers will not cause the Donated Share to be a "prescribed share" (Reg. 6202.1(1))
- the agreement for the sale of the Sale Share by each Donor to a Liquidity Provider will not cause the Sale Share to be a "prescribed share" (Reg. 6202.1(1))
94 C.P.T.J. - Q. 12
A right of recission potentially accorded by securities laws in respect of a misrepresentation in a prospectus generally would not, by itself, result in a share issued pursuant to a prospectus being a prescribed share by virtue of Regulation 6202.1(1)(b).
17 October 1991 T.I. (Tax Window, No. 11, p. 9, ¶1527)
An agreement of the corporation giving it the right, but not the obligation, to acquire the shares for the amount determined by the corporate accountant to be the fair market value of the shares based on an arm's length voluntary liquidation of the corporation's assets would not result in the purchase price of the shares being limited by way of a formula or otherwise.
90 C.P.T.J. - Q.7; 91 C.P.T.J. - Q.19
Where an issuer agrees to pay damages to the subscriber only to the extent of any additional tax payable by the subscriber as a consequence of a reduction under s. 66(12.73) of the expected tax deductions, such an indemnity will not cause the shares to be prescribed shares. It is also permissible where no shares have been issued in respect of any unspent proceeds for the issuer to agree to refund such proceeds to the subscribers provided that the price of any shares subsequently issued is not reduced because of the refund.
90 C.R. - Q. 48
An indemnity by the issuer of flow-through shares to pay tax payable by the subscriber as a consequence of a failure to renounce will not cause the shares to be prescribed shares.
16 March 1990 T.I. (August 1990 Access Letter, ¶1373)
Detailed discussion.
88 C.R. - Q. 25
The agreement of the issuer of the share to pay damages to the subscriber to the extent of any additional tax payable by the subscriber as a consequence of a reduction, pursuant to s. 66(12.73), of the expected tax deductions is acceptable.
Paragraph 6202.1(2)(b)
Administrative Policy
21 November 2013 T.I. 2013-0497641E5 - Flow-through shares and stock options
An employee of a principal-business corporation is granted a stock option, at no cost, to purchase shares of the PBC at a specified exercise price. Would the consideration paid for the purposes of a flow-through share agreement be the fair market value of the shares acquired, or the amount paid by the employee (the exercise price)? After noting that Reg. 6202.1(2)(b)(iv) applies where the corporation provides any assistance whatsoever to acquire a treasury share of the corporation, CRA stated:
Generally, under a stock option plan, the corporation is providing a financial incentive to the employee by allowing the employee the right to acquire a share at a pre-determined price that may be less than the market price. It is our view that a share issued under an employee stock option plan would be a prescribed share by virtue of [Reg.] 6202.1(2)(b)(iv)…and, consequently, would not qualify as a FTS.