A flow-through share is a share which allows the issuing corporation to renounce resource deductions to shareholders who can use such deductions to offset their income. Under the Income Tax Act (Canada) (the Tax Act), the cost of a flow-through share to the shareholder is deemed to be nil. When the shareholder disposes of a flow-through share, the portion of any capital gain that is attributable to the proceeds of disposition up to the shareholder's original cost amount represents a partial recovery by the government of the tax benefit realized by the taxpayer in connection with the renunciation and deduction of the resource expenses.

The provisions of the Tax Act currently deem the taxable capital gain from a disposition by way of gift to a registered charity of a share listed on a "designated stock exchange" (such as the Toronto Stock Exchange) to be zero, such that any capital gain realized on the donation of such share is not subject to tax. Therefore, prior to the introduction of the 2011 Federal Budget (the Budget), the holder of a publicly listed flow-through share could benefit from the renounced expenses and avoid tax on the capital gain by donating the share to a registered charity. As described in more detail below, the Budget proposed to modify the rules so that the donation of a flow‐through share issued pursuant to an agreement entered into on or after March 22, 2011 would trigger a capital gain in the hands of the donor to the extent of the lesser of the original cost amount of the share and the fair market value of the share on the donation date. On October 3, 2011, the Minister of Finance (Canada) tabled a Notice of Ways and Means Motion which contained the flow-through share donation amendments (the Proposed Amendments). The Proposed Amendments were included in Bill C-13, which received first reading in the House of Commons on October 4, 2011. The Proposed Amendments are similar to, but broader than, the proposals contained in the Budget.

Generally, pursuant to the Budget proposals and the Proposed Amendments, if a flow-through share, a right to acquire a flow-through share, or an identical property to such share or right (each of which is included in a "flow-through share class of property") is issued to a taxpayer under a flow‐through share agreement entered into on or after March 22, 2011, the exemption from capital gains tax on donations of publicly listed securities will be available in respect of a subsequent donation by the taxpayer of a property included in a flow-through share class of property only to the extent that the capital gain on the donation exceeds a threshold amount (the "exemption threshold"). The exemption threshold of a taxpayer in respect of a particular class of shares at any particular time will generally be equal to the amount by which (i) the sum of the original cost of all flow‐through shares of the particular class issued to the taxpayer on or after March 22, 2011, exceeds (ii) the amount of each capital gain realized by the taxpayer on a disposition of a property included in a flow-through share class of property, before the particular time and after the first time on or after March 22, 2011 on which flow‐through shares of the particular class were issued to the taxpayer (not exceeding the amount of the exemption threshold immediately before the time of disposition). The Budget and the Proposed Amendments also contain an anti-avoidance provision which causes these rules to apply to property acquired by the donor in certain tax-deferred transactions involving property included in a flow-through share class of property.

For example, assume that a taxpayer acquires 100 flow-through shares at a price of $10 per share. This would result in an exemption threshold to the taxpayer of $1,000. If the taxpayer gifts 50 of the shares when the market value of the shares is $8 per share, the taxpayer would realize a capital gain of $400 (none of which would be exempt) and the taxpayer's exemption threshold would be decreased to $600. If the taxpayer subsequently gifts the remaining 50 shares when the fair market value of the shares is $15 per share, then the taxpayer would realize a capital gain of $750 ($150 of which would be exempt).

The Proposed Amendments expand the Budget proposals to include in the "flow-through share class of property" an interest in a partnership more than 50% of the fair market value of the assets of which is attributable to property included in a flow-through share class of property. The Proposed Amendments also expand the definition of "exemption threshold" so that a taxpayer is required to add to its exemption threshold an amount in respect of an interest in such a partnership. The amount required to be added to the taxpayer's exemption threshold in respect of an interest in the partnership is the taxpayer's adjusted cost base of that interest, generally computed without reference to the taxpayer's share of any deductions for resource expenses that were renounced to the partnership. The addition to the exemption threshold in respect of a partnership interest is made only if (i) the taxpayer made a contribution to the partnership on or after August 16, 2011 or (ii) the taxpayer acquired the interest after the later of August 16, 2011 and the last day, if any, before the particular time on which the taxpayer held an interest in the partnership.

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