| 24(1) | 901867 |
| M.P. Sarazin | |
| (613) 957-2125 | |
| 19(1) | EACC9623 |
September 21, 1990
Dear Sirs:
We are writing in response to your letter dated August 10, 1990 wherein you requested a technical interpretation regarding the application of paragraph 84(3)(a) of the Income Tax Act (Canada) (the "Act") in the following situation.
1. A limited partnership is formed for the purpose of investing in flow-through shares of mining companies. Assume the limited partnership has 25 partners and it invests in flow-through shares of only one mining company.
2. The mining company incurs Canadian exploration expenses (CEE) within the meaning of paragraph 66.1(6)(a) of the Act and renounces such CEE to the partnership and the limited partners in turn are entitled to such CEE as of the fiscal year end of the partnership.
3. One year from the issue of the partnership units (as a result of hold periods imposed by securities legislation), the partnership dissolves and distributes to each of the partners a 1/25 interest in each of the flow-through shares owned by the partnership. The proceeds of disposition of the partnership interest and the cost of the interest in the property received from the partnership are calculated pursuant to the provisions of subsection 98(3) of the Act.
4. Immediately thereafter, each limited partner transfers his 1/25 interest in each share of the mining company to the mining company in return for one whole share which is the equivalent of his ownership in the company previously evidenced by 1/25 of each share. The limited partner and the company elect under subsection 85(1) of the Act so that the transfer of the limited partner's 1/25 interest in each share is made at an agreed amount of $1.00 resulting in a cost of the whole share of $1.00.
5. The flow-through shares acquired by the partnership and distributed to limited partners will have a paid-up capital equal to 50% of the issue price, based on the assumption that all of the monies paid for the flow-through shares have been utilized for CEE.
You are seeking our interpretation as to whether or not the mining company is deemed to have paid a dividend on the flow-through shares which it acquires from the limited partners in exchange for the issue of other shares from treasury.
With reference to the application of subsection 85(1) of the Act, to the transfer described in 4 above, the particular facts would have to be reviewed to determine whether or not there has been a disposition of eligible property to a taxable Canadian corporation. Where shares of a particular class of the capital stock of a corporation are exchanged for identical shares, it is our general position that such a transaction would not constitute a disposition, with the result that an election under subsection 85(1) could not be made. We regret that we cannot provide you with any meaningful comments without a review of all of the relevant facts.
The following comments are based on the assumption that the shares received by the limited partner on the exchange are not identical to the shares which were exchanged.
It is the Department's view that, pursuant to paragraph 84(5)(d) of the Act, the amount paid by the corporation on the redemption, acquisition or cancellation of the shares so transferred to the corporation is, for the purposes of paragraph 84(3) (a) of the Act, an amount equal to the paid-up capital of the share(s) issued in exchange for the flow-through shares. Where the paid-up capital of the new shares (computed in accordance with subsection 85(2.1) of the Act) issued by the mining company exceeds' the paid-up capital of the exchanged flow-through shares then the mining company would be deemed to have paid a dividend equal to the difference. We regret that we cannot provide you with more meaningful comments without a review of all of the relevant facts.
The foregoing represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R dated December 18, 1978, are not binding on the Department.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch