A Canadian exploration company (the Company) wholly-owned by a non-resident company (Company B) whose shares are listed, determined that its mine that had produced, but never successfully, could be restarted if it were able to significantly expand the resource so as to potentially support a much higher throughput. It was proposed that Company B would acquire an undivided interest in the Property from the Company for a cash purchase price equal to its fair market value.
The Company would then conduct exploration for its own account and as agent for Company B. The Company’s portion of the exploration expenditures would be financed by its issuing flow-through (common) shares (FTS) to Company B. To fund its exploration work, Company B would issue FTS to Canadian investors, and renounce to them both the CEE directly incurred by it and the CEE renounced to it by the Company. The reason for Company B issuing FTS is that its listed shares may be more attractive to the Canadian investors.
CRA ruled that:
- Provided that Company B is carrying on a business in Canada, s. 66(12.71) will not apply to prevent Company B from renouncing CEE as per the above.
- Provided Company B and the Company continue to be related at all relevant times, s. 66(12.67)(a) will not apply to prevent Company B from renouncing, to a Canadian investor, CEE that was deemed to be incurred by Company B as a result of the renunciation of CEE by the Company to Company B.