Specialized Audit Programs SectionResource Industries Mara D. PraulinsSection A\Chief
Attention: Jack Hoye
XXXXXXXXXX - Flow-through Shares
This is in reply to your correspondence dated April 22, 1993 wherein you requested our views regarding certain investment units issued by XXXXXXXXXX which include flow-through shares.
The material included with your correspondence indicates that each $XXXXXXXXXX investment unit which was offered and issued by XXXXXXXXXX entitled investors to the following:
XXXXXXXXXX
XXXXXXXXXX
In our view, the entitlements in 2 to 5 above cause the issued flow- through shares to be prescribed shares pursuant to subparagraph 6202.1(1)(b)(iii) and (iv) of the Income Tax Regulations (the "Regulations") with respect to the
XXXXXXXXXX
Regulation 6202.1(1)(c)(ii) would also be applicable with respect to the income and dividend distributions related to the XXXXXXXXXX In addition, Regulation 6202.1(1)(d)(iii) is applicable with respect to the cash and benefits related to the entitlements that clearly represent a repayment or return of consideration for which the flow- through shares were issued.
In your second question with respect to the XXXXXXXXXX you ask whether the requirement contained in Section 32 of the Business Corporations Act prohibiting the payment for repurchase of shares (if as a result the Corporation may not be able to pay its other liabilities) violates any provisions of the Income Tax Act (the "Act"). Section 32 of the Business Corporations Act is applicable to all corporations incorporated under that legislation. We are not aware of any provisions of the Act or the Regulations which section 32 of the Business Corporations Act violates.
Your third question relates to the share redemption price and terms that are covered in the XXXXXXXXXX Offer. According to 66.3(3) of the Act, a flow-through share is deemed to have a cost of nil. In general terms, subsection 66.3(4) of the Act directs that the paid-up capital of a flow-through share is required to be reduced to an amount equal to 50% of the expenses that were renounced in respect of the share. As a result, when a share is repurchased by the issuing corporation, the investor will recognize a deemed dividend to the extent that the proceeds for the share are greater than the reduced paid-up capital amount.
The information is not available with respect to XXXXXXXXXX per share for the return of paid-up capital, thus, we are not in a position to comment further regarding the accuracy of the statement found on XXXXXXXXXX of the Offer.
If you have any questions or would like to discuss these issues in more detail, please contact the writer.
for Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch