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.
Revenue Canada Round Table
Canadian Petroleum Tax Society Conference
June, 1994
Question No. 12
FLOW-THROUGH SHARES
Various securities laws in Canada provide investors who acquire shares (including flow-through shares) under public offerings with the contractual right of rescission and/or the right to damages (in addition to other rights and remedies available at law) where the issuing corporation has made certain types of misrepresentations in a prospectus related to the issuance of the shares and the investors have no knowledge of such misrepresentations prior to the acquisition of the shares. In the case of rescission, the investor may become entitled to a full refund of all consideration paid on the acquisition of the shares issued to such investor. Paragraph 6202.1(1)(b) of the Income Tax Regulations provides that a share will be a prescribed share, and therefore not a flow-through share, where, inter alia, at the time it is issued, any person has, either absolutely or contingently, an obligation to make a payment, either immediately or in the future, that may reasonably be considered to be, directly or indirectly, a repayment or return by the corporation of "all or part of the consideration for which the share was issued...".
Does the Department agree that the interpretation of paragraph 6202.1(1)(b) of the Regulations should be restricted so that the contractual rights of rescission found in most securities laws in Canada will not cause flow-through shares issued thereunder to be considered "prescribed shares", and therefore not eligible as flow-through shares, for the purposes of the Income Tax Act?
Department's Position
Whether or not a share of the capital stock of a corporation is a "prescribed share" under section 6202.1 of the Regulations at the time it is issued is a question of fact which can only be determined with reference to all of the facts relevant to a particular situation.
In our view, the above described contractual rights of rescission which would be found in most securities laws in Canada in respect of misrepresentations in a prospectus related to the issuance of flow-through shares, in and by themselves, will not generally result in the shares being "prescribed" by virtue of paragraph 6202.1(1)(b) of the Regulations.
Author:A.A. Cameron
File:941032
Date:June 14, 1994