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: Will the payment of fees by the Issuer to the Promotor cause the shares to be prescribed shares within the meaning of section 6202.1 of the Regulations?
Position: All the facts and circumstances of a particular situation would need to be considered before determining whether a particular share is a prescribed share within the meaning of section 6202.1 of the Regulations.
Reasons: The law.
Author: Christov, Boriana
Section: s. 66(15) definitions of “flow-through share,” “principal business corporation;” s. 237.1, s. 118.1, section 6202.1 of the Regulations.
December 9, 2020
Re: Fees Paid in the Course of a Flow-through Shares Transaction
This is in response to your request for our views on the possible tax consequences arising from the payment of certain fees by the issuer (the “Issuer”) of flow-through shares (“FTSs”) to a person who facilitates the transactions and acts as a promotor (the “Promotor”). More precisely, you are interested to know whether the payment of certain fees by the Issuer to the Promotor would cause the shares to be prescribed shares within the meaning of section 6202.1 of the Income Tax Regulations (footnote 1) (the “Regulations”).
Unless otherwise stated all the statutory references herein are to the provisions of the Income Tax Act (footnote 2) (the “Act”) and the Income Tax Regulations (the “Regulations”).
I. OVERVIEW OF THE FTSS TRANSACTIONS
You have described the following transactions:
* a resource company (the “Issuer”) that is a principal-business corporation (a “PBC”) issues publicly-listed shares pursuant to FTS agreements to individual investors (the “Investors”);
* according to the terms of the FTS agreements, the Issuer renounces eligible resource expenditures to the Investors; and
* an end-purchaser of the FTSs acquires the FTSs from the Investors (the “Liquidity Provider”).
In connection with the FTS offering, the Issuer may retain an underwriter (an “Underwriter”) to assist it with finding Investors to participate in the Issuer’s FTS offering and to provide other related services, in consideration for which the Issuer will pay the Underwriter a fee which may be in the range of 3 to 6% of the FTSs subscription price (an “Offering Assistance Fee”).
Alternatively, in some circumstances involving smaller FTS offerings, the Issuer may not retain an Underwriter and, instead, the Promoter will agree to assist the Issuer with finding Investors to participate in the Issuer’s FTS offering and the Issuer will pay an Offering Assistance Fee to the Promoter in consideration for that assistance.
II. YOUR QUESTION
You have asked whether, in a circumstance where the Issuer does not retain an Underwriter in connection with its FTS offering, the payment by the Issuer to the Promoter of an Offering Assistance Fee as consideration for the Promoter assisting the Issuer with finding Investors to participate in the FTS offering and providing other related services, would result in the FTSs issued under that FTS offering becoming prescribed shares within section 6202.1 of the Regulations.
III. OUR COMMENTS
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a particular taxpayer, but it is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.
This technical interpretation does not examine the tax consequences of FTSs transactions which are part of an arrangement pursuant to which the Investor donates all or part of the FTSs to a qualified donee and the donation is considered to be a charitable gift within the meaning of section 118.1 of the Act. Furthermore, this technical interpretation does not consider FTSs transactions that meet the definition of a “tax shelter” in subsection 237.1(1).
A. Flow Through Shares
For a share to qualify as a “flow through share,” it must meet all the requirements set out in the definition of that term in subsection 66(15). One such requirement is that the share must not be a prescribed share.
B. Prescribed Shares
Subsections 6202.1(1) and (2) of the Regulations describe the features or circumstances that will cause a share to be a prescribed share. In very general terms, these would include shares that have attributes or benefits not normally associated with a common share. In addition, any arrangements or privileges designed to guarantee the Investor a minimum return or guarantee the original investment will generally cause a share to be a prescribed share.
Generally, we would not expect that the payment of an Offering Assistance Fee by the Issuer to the Promotor of a FTS offering would, in and by itself, cause shares issued under the FTS offering to be prescribed shares within section 6202.1 of the Regulations if the Offering Assistance Fee is paid in circumstances where all the parties involved in the FTS offering, namely the Issuer, the Investor, the Promotor and the Liquidity Provider, deal with one another at arm’s length and the amount of the Offering Assistance Fee is equal to the fair market value of the services for which it is paid. However, subsections 6202.1(1) and (2) are complex provisions that set out numerous factors to be considered when determining whether a particular share is a prescribed share, and therefore not a FTS. As a result, all of the facts and circumstances surrounding a FTS offering would need to be considered in detail before concluding whether a particular share issued under that FTS offering is a prescribed share and therefore not a FTS.
We trust that these comments will be of assistance.
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 C.R.C. c. 945 as amended.
2 R.S.C. 1985, c. 1 (5th suppl.) as amended.
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