2008 Ruling 2008-0281941R3 - 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, in this particular case.

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 renounced to the donor and any investment tax credit claimed pursuant to the flow-through share financing will not constitute an advantage under the draft split-receipting rules.

XXXXXXXXXX 					2008-028194

XXXXXXXXXX , 2008

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, other than ruling 2008-026928, 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 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) "Agent" means XXXXXXXXXX .,
c) "Arrangement" means the proposed transactions as described below,
d) "CEE" means Canadian exploration expenses as defined in subsection 66.1(6),
e) "Charities" means Charity A, Charity B and Charity C, collectively,
f) "Charity A" means XXXXXXXXXX ,
g) "Charity B" means XXXXXXXXXX ,
h) "Charity C" means XXXXXXXXXX ,
i) "CRA" means the Canada Revenue Agency,
j) "Donor A" means XXXXXXXXXX ,
k) "Donor B" means XXXXXXXXXX ,
l) "Donor C" means XXXXXXXXXX ,
m) "Donor D" means XXXXXXXXXX ,
n) "Donors" means Donor A, Donor B, Donor C, and Donor D, collectively,
o) "Exchange" means the XXXXXXXXXX ,
p) "Liquidity Provider A" means XXXXXXXXXX ,
q) "Liquidity Provider B" means XXXXXXXXXX ,
r) "Liquidity Providers" means Liquidity Provider A and Liquidity Provider B, collectively,
s) "Promoter" means XXXXXXXXXX .,
t) "Regulations" means the Income Tax Regulations promulgated under the Act,
u) "Resource Company" means XXXXXXXXXX ., and
v) "Share" means a common share of the Resource Company as described in 13 below.

Facts

1) The Promoter was incorporated under the Business Corporations Act (XXXXXXXXXX ) on XXXXXXXXXX . It is a "taxable Canadian corporation" as defined in subsection 89(1). Its address is XXXXXXXXXX . The Promoter's tax services office is the XXXXXXXXXX TSO. It has a fiscal year ending on XXXXXXXXXX .

2) The Promoter provides fundraising and related services to individual and corporate philanthropists and registered charities.

3) The Promoter 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) ACO is an investment dealer in Canada and a member of the Investment Dealers Association. Its address is XXXXXXXXXX .

5) The Donors are individuals resident in Canada. You advise that the Donors are not traders or dealers in securities and do not hold securities as inventory.

6) The Resource Company is a "taxable Canadian corporation" and a "public corporation" as defined in subsection 89(1). XXXXXXXXXX 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 the Exchange.

7) Each Charity is a registered charity and a "qualified donee" as described in subsection 149.1(1).

8) You advise that the Liquidity Providers are independent parties which will acquire the Shares in the ordinary course of their business. The Liquidity Providers were identified by ACO.

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

Proposed Transactions

10) The Resource Company intends to issue and sell, on a private placement basis through one or more closings, an aggregate of a maximum of XXXXXXXXXX flow-through shares in the Resource Company to raise gross proceeds of up to $XXXXXXXXXX . In this regard, on XXXXXXXXXX , the Resource Company completed an initial closing of a private placement offering of flow-through shares in the Resource Company. Pursuant to the initial private placement, the Resource Company issued XXXXXXXXXX flow-through shares at a price of $XXXXXXXXXX per share, for gross proceeds of $XXXXXXXXXX . The Resource Company plans to complete the second private placement which will be subject to the same terms and conditions as the initial private placement. You advise that the Donors will subscribe for XXXXXXXXXX of the flow-through shares under the second private placement.

11) The Agent acts as agent for the private placements. The Resource Company has negotiated the terms of the flow through offering, including the subscription price and premium over market trading price, with the Agent. Pursuant to the agency agreement, the Agent will receive from the Resource Company a cash commission of XXXXXXXXXX % of the gross proceeds from sales of shares under the offering, plus warrants entitling the Agent to acquire such number of common shares equal to XXXXXXXXXX % of the shares sold. Each warrant will be exercisable at a price of $XXXXXXXXXX per common share of the Resource Company for a period of XXXXXXXXXX months commencing from the closing date. You advise that the Agent has created a selling group of investment dealers, and is acting as the lead. ACO is a participant in the selling group and will receive from the Agent, out of the commission payable by the Resource Company to the Agent, a commission equal to XXXXXXXXXX % of the gross proceeds of the shares that it sells. ACO will also be entitled to receive out of the Agent's warrants, warrants representing XXXXXXXXXX % of the shares sold.

12) The Donors will open a non-discretionary brokerage account with ACO and will deposit sufficient cash to pay the anticipated subscription price for the Shares. ACO will confirm with the Donors that they agree to subscribe for the Shares on the terms of the flow-through share offering. ACO will not act as agent of the Donors for any purpose relating to the subscription, but will receive its commission as described in 11 above.

13) The Resource Company will enter into subscription agreements directly with the Donors to issue the Shares under the flow-through share offering. Pursuant to the subscription agreement, the subscription price will be $XXXXXXXXXX per Share.

14) The Shares will be issued pursuant to the subscription agreement. The subscription price for the Shares issued to the Donors will be paid from the funds deposited with ACO. The Donors will not borrow the funds used to subscribe for the Shares. Once issued, the Shares will be listed on the Exchange.

15) 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.

16) In the event that any of the CEE renounced to the Donors as described in 15 above qualifies as a "flow-through mining expenditure" within the meaning of subsection 127(9), the Donors will claim an investment tax credit to the extent provided for in subparagraph 127(5)(a)(i).

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

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

Donor		Charity		No. of Shares

Donor A	Charity A		XXXXXXXXXX
Donor B	Charity B		XXXXXXXXXX
Donor C	Charity C		XXXXXXXXXX
Donor D	Charity C		XXXXXXXXXX

19) The Donors will donate their Shares to their Charities by Deed of Gift. They will convey the Shares by directing the transfer agent to register the certificates for the Shares 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 donated to it. You advise that the receipt will contain the information required by subsection 3501(1) of the Regulations.

20) You advise that the Charities have indicated that they do not want to retain the Shares, but instead want to sell them to realize cash for their charitable purposes. The Liquidity Providers will make an offer to purchase all of the donated Shares from the Charities. The Charities will sell their Shares to the Liquidity Providers as follows:

Charity	Liquidity Provider	No. of Shares

Charity A	Liquidity Provider A	XXXXXXXXXX
Charity B	Liquidity Provider A	XXXXXXXXXX
Charity C	Liquidity Provider A	XXXXXXXXXX
Charity C	Liquidity Provider B	XXXXXXXXXX

21) The price payable by the Liquidity Providers will be $XXXXXXXXXX per Share. ACO negotiated the terms of the sale agreement between the Charities and the Liquidity Providers. They have negotiated this price at arm's length, without any direction or influence from the Donors, the Promoter or the Resource Company. The Charities will direct the transfer agent to register the certificates for the Shares in the name of the Liquidity Providers.

22) As consideration for having arranged the series of transactions, the Charities will pay a fee to the Promoter equal to XXXXXXXXXX % of the gross selling price of the Shares sold to the Liquidity Providers.

23) You advise that none of the Charities has given any undertaking or is obliged in any way to sell the Shares to the Liquidity Providers and none of the Liquidity Providers is under obligation or has a right to acquire the Shares from the Charities. A Charity can still participate in the Arrangement if it chooses not to sell the donated Shares to a Liquidity Provider. If a Charity wished to hold the donated Shares 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 Promoter a fee as described in 22 above based on that ultimate sale price. However, since by holding the donated Shares, 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 Shares to the Liquidity Provider.

24) You advise that no fees, commissions, or compensation of any kind will be paid by or received by any participants in the proposed transactions other than those described in 11, 22 and 23 above.

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

Purpose of the Proposed Transactions

26) The purpose of the proposed transactions is to allow the Donors to respond to the 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. Consequently, Liquidity Providers have been found to purchase the Shares 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

b. 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 Providers deal at arm's length, neither the donation of the Shares to the Charity by a Donor nor the sale of the Shares to a Liquidity Provider as described above will, in and by themselves, cause a Share to be a prescribed share, within the meaning of section 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 donated by each Donor to the Donor's respective Charity, as described in 18 and 19 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. 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).

F. 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 which received Second Reading in the Senate on December 4, 2007, are enacted substantially as proposed, it is our opinion, subject to the caveats noted below, that the CEE renounced to the Donors and any investment tax credit claimed 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. In this regard, we have indicated that the sales price received by the Charities from the sale of the Shares to the Liquidity Providers as described in 20 and 21 above may not be representative of the fair market value of the Shares at the time the Shares 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