The Canada Revenue Agency has recently published several advance tax rulings concerning a strategy involving the donation of flow-through shares to a charity.

In general, this mechanism is used by mining or energy companies aiming to raise funds by issuing flow-through shares1. Investors subscribe to flow-through shares and immediately give them to a registered charity. The charity issues an official donation receipt equal to the fair market value of the shares given. The charity then transfers the flow-through shares to a third party purchaser.

In such arrangements, the CRA determined that the applicable tax considerations are as follows:

  1. If the flow-through shares are acquired solely to give to a charity, this series of transactions may constitute a “gifting arrangement” that is a “tax shelter”2. If this is the case, no deduction may be claimed, unless a tax shelter ID number is assigned by the federal and Quebec government before subscription. Prescribed forms must be filed with the tax authorities to obtain such tax shelter numbers.
  2. The gift of the flow-through shares to a charity will be considered to be an eligible donation and will not prevent investors from taking advantage of tax deductions and credits otherwise available.
  3. Neither the donation of the flow-through shares by the donor nor the subsequent sale of the shares by the charity will cause the flow-through shares to be “prescribed shares”3 that are ineligible for flow-through benefits.
  4. An amount equal to the fair market value of the shares on the date of the donation will qualify as an eligible donation subject to the issuance of an official receipt including the required information.
  5. No portion of the capital gain resulting from the donation of the shares, if any, will be included in the donors’ income, as long as the shares are held as capital property and are shares of public companies.

Although the tax authorities approve this strategy permitting interesting tax advantages, i.e. deductions in respect of the flow-through shares and credits for donation, so that the after-tax cost is minimal, the implementation of this strategy is complex and requires the expertise of a tax professional. Please contact the Miller Thomson Tax Practice Group for further information.