Section 38.1 — Income Tax Act: Tax-deferred transaction — flow-through shares

If a taxpayer acquires a property (in this section referred to as the “acquired property”) that is included in a flow-through share class of property in the course of a transaction or series of transactions to which any of section 51, subsections 73(1), 85(1) and (2) and 85.1(1), sections 86 and 87 and subsections 88(1) and 98(3) apply if the transfer of the acquired property is part of a gifting arrangement (within the meaning assigned by section 237.1) or of a transaction or series of transactions to which subsection 98(3) applies, or the transferor is a person with whom the taxpayer was, at the time of the acquisition, not dealing at arm’s length, there shall be added, at the time of the transfer, to the taxpayer’s exemption threshold in respect of the flow-through share class of property, and deducted from the transferor’s exemption threshold in respect of the flow-through share class of property, the amount determined by the formula A × B where A is the amount by which the transferor’s exemption threshold in respect of the flow-through share class of property immediately before that time exceeds the capital gain, if any, of the transferor as a result of the transfer, and B is the proportion that the fair market value of the acquired property immediately before the transfer is of the fair market value of all property of the transferor immediately before the transfer that is included in the flow-through share class of property;

and if the transferor receives particular shares of the capital stock of the taxpayer as consideration for the acquired property and those particular shares are listed on a designated stock exchange or are shares of a mutual fund corporation, then for the purposes of this section and subsection 40(12) the particular shares are deemed to be flow-through shares of the transferor, and there shall be added to the transferor’s exemption threshold in respect of the flow-through share class of property that includes the particular shares the amount that is determined under paragraph (a) or that would be so determined if paragraph (a) applied to the taxpayer.