Principal Issues: Tax consequences of shares owned by a prospector at the time of his death where section 35 was applicable to the receipt of the shares.
Position: Where the shares represent capital property, paragraph 70(5)(a) will deem a disposition of the shares and the prospector will have an income inclusion under paragraph 35(1)(d) and a deduction under paragraph 110(1)(d.2).
Reasons: Application of the law.
XXXXXXXXXX 2008-026945 Fiona Harrison June 16, 2008
Dear XXXXXXXXXX :
Re: Prospector's Income
This is in reply to your facsimile transmittal request concerning the income tax treatment of shares held or receivable by an estate of a deceased prospector. You have advised us that the prospector had previously entered into an agreement with a corporation whereunder the prospector disposed of a mining claim to the corporation, and as consideration therefor, received a right to receive blocks of shares of the corporation over several years. At the date of his death, the prospector owned two blocks of shares. His estate is entitled to receive two more blocks of shares in the future.
It is your view that, in the prospector's final tax return, paragraph 35(1)(d) of the Income Tax Act (the "Act") would be applicable and the prospector would have an income inclusion thereunder and would be entitled to a deduction under paragraph 110(1)(d.2). Your query relates to the tax consequences applicable to the estate in respect of the shares to be received in the future. You enquire as to whether the shares will be considered as "rights or things" within the meaning assigned in subsection 70(2) of the Act.
Our Comments
Subsection 35(1) of the Act applies where shares of a corporation are received in a taxation year by an individual who is a prospector as consideration for the disposition to the corporation of an interest in a right, licence or privilege to prospect, explore, drill or mine for minerals in a mineral resource in Canada, or Canadian real property the principal value of which depends upon its mineral resource content where such property was acquired as a result of the individual's efforts as a prospector.
In our view, the prospector would be subject to the provisions of section 35 when he received the two blocks of shares. Accordingly, no amount is required to be included in the prospector's income at the time that the shares are received and the cost of the shares to the prospector is nil. We are assuming that the shares represent capital property to the prospector.
Upon the death of the prospector, paragraph 70(5)(a) will deem the prospector to have disposed of the two blocks of shares owned by him immediately before his death at fair market value. Accordingly, paragraph 35(1)(d) would be applicable and the prospector would have an income inclusion thereunder and would be entitled to a deduction under paragraph 110(1)(d.2). In the event that the lesser of the amounts described in paragraph 35(1)(d) is the fair market value of the shares at the time they were acquired, the prospector would also realize a capital gain to the extent that the fair market value of the shares at the time of death exceeds their fair market value at the time of their acquisition. The right of the prospector to receive the two additional blocks of shares will be considered as "property" as that term is defined under subsection 248(1). Where this right is "capital property" to the prospector, within the meaning of section 54, paragraph 70(5)(a) will deem the prospector to have disposed of this right immediately before his death at fair market value. Under paragraph 70(5)(b), the estate will be deemed to have acquired the property at the time of death at a cost equal to its fair market value.
We trust the above comments are of assistance. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R5.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislation, Policy and Regulatory Affairs Branch