| 5-902662 | |
| Flow-Through Shares |
Question
If an issuer of flow-through shares falls to spend and renounce the whole of the subscription price for the flow-through shares on qualifying expenditures, it is common to provide under the subscription agreement that the issuer must refund the unspent proceeds and/or pay damages to the subscriber in respect of the failure to provide the expected tax deductions. Will such provisions cause the shares to be "prescribed shares" having particular regard to regulation 6202.1(1)(c)?
Department's Position
Provided that
1) the flow-through shares are issued after June 17, 1987, and;
2) the issuer agrees to pay damages to the subscriber only to the extent of any additional tax payable by the subscriber - pursuant to subsection 66(12.73) - as a consequence of a reduction of the expected tax deductions by the subscriber,
it is our view that such an indemnity would not cause any issued shares to be "prescribed shares" within the meaning of regulation 6202.1.
It is also our view that where no shares have been issued in respect of any unspent proceeds, the issuer agrees to refund such proceeds to the subscribers, and the price of any shares subsequently issued will not be reduced because of the refund, such an indemnity would not cause the prescribed share rules to apply.