Issuer
Free Writing Prospectus
Filed
Pursuant to Rule 433
Registration
Statement No. 333-162677
November
14, 2010
The
Company has filed a registration statement, including a prospectus,
(Registration No. 333-162677), with the SEC for the offering to which this
communication relates. Before you invest, you should read the
prospectus in that registration statement, together with the prospectus
supplement to be prepared and filed with the SEC in connection with the offering
to which this communication relates, and other documents the Company has filed
with the SEC for more complete information about the Company and this offering.
You may get these documents, when available, for free by visiting EDGAR on the
SEC website at www.sec.gov. Alternatively, the Company will arrange to send you
the base prospectus, the prospectus supplement (when available), and any other
offering documents if you request them by calling (604) 638-5050.
CANADIAN
FEDERAL INCOME TAX CONSIDERATIONS
The
following summary describes the principal Canadian federal income tax
considerations generally applicable to a purchaser who acquires, as a beneficial
owner, Units pursuant to this Offering and who, at all relevant
times, for the purposes of the application of the
Income
Tax Act
(Canada) and the Income Tax Regulations (collectively, the “
Tax
Act
”), deals at arm’s length with the Company; is not affiliated with the
Company, the Underwriters or a subsequent holder of the Shares and Warrants; and
holds the Shares and Warrants as capital property (a “
Holder
”). Generally,
the Shares and Warrants will be capital property to a Holder provided the Holder
does not acquire or hold those Shares or Warrants in the course of carrying on a
business or as part of an adventure or concern in the nature of
trade.
This
summary is
based on the current provisions of the Tax Act and the current published
administrative policies and assessing practices of the Canada Revenue Agency
(“
CRA
”) published in
writing prior to the date hereof. This summary also takes into account all
specific proposals to amend the Tax Act and Regulations publicly announced by
the Minister of Finance (Canada) prior to the date hereof (collectively, the
“
Tax Proposals
”) and
assumes all Tax Proposals will be enacted in the form proposed. There is no
certainty that the Tax Proposals will be enacted in the form proposed, if at
all. This summary does not otherwise take into account or anticipate any changes
in laws or administrative policy or assessing practice whether by judicial,
regulatory, administrative or legislative decision or action nor does it take
into account provincial, territorial or foreign income tax legislation or
considerations.
This
summary is of a general nature only and is not, and is not intended to be, nor
should it be construed to be, legal or tax advice to any particular purchaser of
Units. This summary is not exhaustive of all Canadian federal income
tax considerations. Accordingly, purchasers should consult their own
tax advisors regarding the income tax consequences of purchasing Units based on
their particular circumstances.
Holders
Resident in Canada
This
portion of the summary is generally applicable to a Holder who, at all relevant
times, for the purposes of the Tax Act is, or is deemed to be, resident in
Canada (a “
Resident
Holder
”). Certain Resident Holders may be entitled to make, or may have
already made, the irrevocable election permitted by subsection 39(4) of the Tax
Act the effect of which may be to deem to be capital property any Shares and all
other “Canadian securities” (as defined in the Tax Act) owned by such Resident
Holder in the taxation year in which the election is made and in all subsequent
taxation years. Resident Holders should consult their own tax
advisors for advice as to whether an election under subsection 39(4) is
available and/or advisable in their particular circumstances.
This
portion of the summary is not applicable to a Holder that is a “specified
financial institution”; a Holder an interest in which is a “tax shelter
investment”; a Holder that is a “financial institution” for purposes of the
mark-to-market rules contained in the Tax Act; or a Holder that has made a
“functional currency” reporting election, each as defined in the Tax Act. Such
Holders should consult their own tax advisors.
Acquisition
of Shares and Warrants
A
Resident Holder must allocate the total purchase price of Cdn.$0.28 for a Unit
on a reasonable basis between the Share and the Warrant to determine the cost of
each for its purposes under the Tax Act. For its own purposes, the Company
intends to allocate Cdn.$0.08 to the Warrant and Cdn.$0.20 to the Share of the
$0.28 issue price of each Unit for its purposes under the Tax Act. Although the
Company believes its allocation is reasonable, it is not binding on the Resident
Holder or the CRA. The Resident Holder’s adjusted cost base of the Share
comprising a part of each Unit will be determined by averaging the cost
allocated to the Share with the adjusted cost base to the Resident Holder of all
other Shares owned by the Resident Holder (other than certain Shares acquired
under the Company’s employee stock option plan, if any) immediately prior to
such acquisition.
Exercise
of Warrants
Where a
Resident Holder exercises a Warrant to acquire a Share, no gain or loss will
arise for purposes of the Tax Act. The Resident Holder’s cost of the Share
acquired on the exercise of the Warrant will be equal to the adjusted cost base
of the Warrant and the exercise price paid for the Share. The Resident Holder’s
adjusted cost base of the Share acquired on the exercise of the Warrant will be
determined by averaging the cost allocated to the Share with the adjusted cost
base to the Resident Holder of all other Shares owned by the Resident Holder
(other than certain Shares acquired under the Company’s employee stock option
plan, if any) immediately prior to such acquisition.
Disposition
and Expiry of Warrants
On a
disposition or deemed disposition of a Warrant (other than on the exercise
thereof), a Resident Holder will realize a capital gain (or capital loss) equal
to the amount, if any, by which the proceeds of disposition, net of any
reasonable costs of disposition, exceed (or are less than) the adjusted cost
base to the Resident Holder of the Warrant immediately before the disposition or
the deemed disposition. If an unexercised Warrant expires, the Resident Holder
will realize a capital loss equal to the Resident Holder’s adjusted cost base of
the unexercised, expired Warrant. The tax treatment of capital gains and capital
losses is discussed in greater detail under the heading “Dispositions of
Shares”.
Dividends
A
Resident Holder will be required to include in computing its income for a
taxation year any dividends received or deemed to be received on the Shares. In
the case of a Resident Holder that is an individual (other than certain trusts),
such dividends will be subject to the gross-up and dividend tax credit rules
applicable to taxable dividends received or deemed to be received from taxable
Canadian corporations, including the enhanced gross-up and dividend tax credit
applicable to any dividends designated by us as “eligible dividends” in
accordance with the provisions of the Tax Act. Although the Company
currently anticipates that all dividends to Resident Holders will be designated
as “eligible dividends”, it is possible that such dividends may not be so
designated. A dividend received by a Resident Holder that is a corporation must
be included in computing its income but generally will be deductible in
computing the corporation’s taxable income.
A
Resident Holder that is a “private corporation”, as defined in the Tax Act, or
any other corporation controlled, whether because of a beneficial interest in
one or more trusts or otherwise, by or for the benefit of an individual (other
than a trust) or a related group of individuals (other than trusts) will
generally be liable to pay a refundable tax of 331⁄3% under Part IV of the Tax
Act on dividends received on the Shares to the extent such dividends are
deductible in computing the Resident Holder’s taxable income for the
year.
Dispositions
Generally,
on a disposition or deemed disposition of a Share, a Resident Holder will
realize a capital gain (or capital loss) equal to the amount, if any, by which
the proceeds of disposition, net of any reasonable costs of disposition, exceed
(or are less than) the adjusted cost base to the Resident Holder of the Share
immediately before the disposition or the deemed disposition.
Generally,
a Resident Holder is required to include in computing its income for a taxation
year one-half of the amount of any capital gain (a “
taxable
capital gain
”) realized in the year. Subject to and in accordance with
the provisions of the Tax Act, a Resident Holder is required to deduct one-half
of the amount of any capital loss (an “
allowable
capital loss
”) realized in a taxation year from taxable capital gains
realized by the Resident Holder in the year. Allowable capital losses in excess
of taxable capital gains may be carried back and deducted in any of the three
preceding taxation years or carried forward and deducted in any subsequent
taxation year against net taxable capital gains realized in such years, to the
extent and under the circumstances described in the Tax Act.
The
amount of any capital loss realized by a Resident Holder that is a corporation
on the disposition or deemed disposition of a Share may be reduced by the amount
of dividends received or deemed to have been received by it on such share, to
the extent and in the circumstances prescribed by the Tax Act. Similar rules may
apply where a Share is owned by a partnership or trust of which a corporation,
trust or partnership is a member or beneficiary. Resident Holders to whom these
rules may be relevant should consult their own tax advisors.
A Holder
that is throughout the year a “Canadian-controlled private corporation”, as
defined in the Tax Act, is liable for tax, a portion of which may be refundable,
on investment income, including taxable capital gains realized and dividends
received in respect of the Shares (but not dividends that are deductible in
computing taxable income).
Alternative
Minimum Tax
Capital
gains realized on the disposition of Shares or Warrants by a Resident Holder who
is an individual or a trust may give rise to a liability to pay alternative
minimum tax.
Eligibility
for Investment
The
Shares would, if issued on the date hereof and listed on a “designated stock
exchange”, as defined in the Tax Act, (which includes the TSX) be qualified
investments under the Tax Act for a trust governed by a registered retirement
savings plan, registered retirement income fund, registered education savings
plan, deferred profit sharing plan, registered disability savings plan
(collectively, the “
Deferred
Plans
”) and a tax-free savings account (“
TFSA
”).
If the
Shares are qualified investments for Deferred Plans and a TFSA, generally the
Warrants should also be qualified investments for Deferred Plans and a
TFSA.
Notwithstanding
that the Shares or Warrants may be a qualified investment for a trust governed
by a TFSA, the holder of a TFSA will be subject to a penalty tax on the Shares
or Warrants held in the TFSA if such Shares or Warrants are a “prohibited
investment” for that TFSA. The Shares and Warrants will generally be
a “prohibited investment” if the holder of the TFSA does not deal at arm’s
length with the Company for the purposes of the Tax Act or the holder of the
TFSA has a “significant interest” (within the meaning of the Tax Act) in the
Company or a corporation, partnership or trust with which the Company does not
deal at arm’s length for the purposes of the Tax Act.
Holders
Not Resident in Canada
This
portion of the summary is generally applicable to a Holder who, at all relevant
times, for purposes of the application of the Tax Act, is not, and is not deemed
to be, resident in Canada and does not use or hold, and is not deemed to use or
hold, the Shares in a business carried on in Canada (a “
Non-Resident
Holder
”). Special rules, which are not discussed in this
summary, may apply to a Non-Resident Holder that is an insurer that carries on
an insurance business in Canada and elsewhere.
Dividends
Dividends
paid or credited or deemed to be paid or credited to a Non-Resident Holder by
the Company will be subject to Canadian withholding tax at the rate of 25%,
subject to any reduction in the rate of withholding to which the Non-Resident
Holder is entitled under any applicable income tax convention between Canada and
the country in which the Non-Resident Holder is resident. For example, where the
Non-Resident Holder is a resident of the United States and is entitled to
benefits under the Canada-United States Income Tax Convention (1980) and is the
beneficial owner of the dividends, the applicable rate of Canadian withholding
tax is generally reduced to 15%.
Dispositions
A
Non-Resident Holder will not be subject to tax under the Tax Act on any capital
gain realized on a disposition of a Share or Warrant, unless the Share or
Warrant is or is deemed to be “taxable Canadian property” to the Non-Resident
Holder for the purposes of the Tax Act and the Non-Resident Holder is not
entitled to relief under an applicable income tax convention between Canada and
the country in which the Non-Resident Holder is resident.
Generally,
provided the Shares are listed on a “designated stock exchange” as defined in
the Tax Act (which includes the TSX) at the time of disposition, the Shares will
not constitute taxable Canadian property of a Non-Resident Holder, unless at any
time during the 60-month period immediately preceding the disposition, the
Non-Resident Holder, persons with whom the Non-Resident Holder did not deal at
arm’s length, or the Non-Resident Holder together with all such persons, owned
25% or more of the issued Shares or any other class of our shares and more than
50% of the fair market value of the Shares was derived directly or indirectly
from any one or combination of (i) real or immovable property situated in
Canada,(ii) Canadian resource properties, (iii) timber resource properties, and
(iv) options in respect of, or interests in, or for civil rights law rights in,
property described in any of (i) to (iii), whether or not that property
exists.
If the
Shares constitute taxable Canadian property of a particular Non-Resident Holder,
the Warrants will also constitute taxable Canadian property of that Non-Resident
Holder.
Notwithstanding
the foregoing, in certain circumstances set out in the Tax Act, the Shares may
be deemed to be taxable Canadian property. Non-Resident Holders whose Shares
constitute taxable Canadian property should consult with their own tax
advisors.
CERTAIN
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The
following is a general summary of certain U.S. federal income tax considerations
applicable to a U.S. Holder (as defined below) arising from and relating to the
acquisition, ownership and disposition of Units acquired pursuant to this
document, the acquisition, ownership, and disposition of Common
Shares acquired as part of the Units, the exercise, disposition, and lapse of
Warrants acquired as part of the Units, and the acquisition, ownership, and
disposition of Warrant Shares received on exercise of the
Warrants.
If an
entity that is classified as a partnership for U.S. federal income tax purposes
holds Units, Common Shares, Warrants or Warrant Shares, the U.S. federal income
tax consequences to such partnership and the partners of such partnership
generally will depend on the activities of the partnership and the status of
such partners. Partners of entities that are classified as
partnerships for U.S. federal income tax purposes should consult their own tax
advisor regarding the U.S. federal income tax consequences arising from and
relating to the acquisition, ownership, and disposition of Units, Common Shares,
Warrants and Warrant Shares.
This
summary is for general information purposes only and does not purport to be a
complete analysis or listing of all potential U.S. federal income tax
considerations that may apply to a U.S. Holder as a result of the acquisition of
Units pursuant to this document. In addition, this summary does not
take into account the individual facts and circumstances of any particular U.S.
Holder that may affect the U.S. federal income tax consequences to such U.S.
Holder, including specific tax consequences to a U.S. Holder under an applicable
tax treaty. Accordingly, this summary is not intended to be, and
should not be construed as, legal or U.S. federal income tax advice with respect
to any U.S. Holder. This summary does not address the U.S. federal
alternative minimum, U.S. federal estate and gift, U.S. state and local, or
foreign tax consequences to U.S. Holders of the acquisition, ownership, and
disposition of Units, Common Shares, Warrants and Warrant
Shares. Each U.S. Holder should consult its own tax advisor regarding
the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and
gift, U.S. state and local, and foreign tax consequences relating to the
acquisition, ownership and disposition of Units, Common Shares, Warrants and
Warrant Shares.
No legal
opinion from U.S. legal counsel or ruling from the Internal Revenue Service (the
“IRS”) has been requested, or will be obtained, regarding the US. federal income
tax considerations applicable to U.S. Holders as discussed in this
summary. This summary is not binding on the IRS, and the IRS is not
precluded from taking a position that is different from, and contrary to, the
positions taken in this summary. In addition, because the authorities
on which this summary is based are subject to various interpretations, the IRS
and the U.S. courts could disagree with one or more of the positions taken in
this summary.
NOTICE
PURSUANT TO IRS CIRCULAR 230: NOTHING CONTAINED IN THIS SUMMARY CONCERNING ANY
U.S. FEDERAL TAX ISSUE IS INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED,
BY A U.S. HOLDER (AS DEFINED BELOW), FOR THE PURPOSE OF AVOIDING U.S. FEDERAL
TAX PENALTIES UNDER THE U.S. CODE (AS DEFINED BELOW). THIS SUMMARY WAS WRITTEN
TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED
BY THIS DOCUMENT. EACH U.S. HOLDER SHOULD SEEK U.S. FEDERAL TAX ADVICE, BASED ON
SUCH U.S. HOLDER’S PARTICULAR CIRCUMSTANCES, FROM AN INDEPENDENT TAX
ADVISOR.
Scope
of this Summary
Authorities
This
summary is based on the Internal Revenue Code of 1986, as amended (the “Code”),
Treasury Regulations (whether final, temporary, or
proposed), published rulings of the IRS, published administrative
positions of the IRS, U.S. court decisions and the Convention Between Canada and
the United States of America with Respect to Taxes on Income and on Capital,
signed September 26, 1980, as amended (the “Canada-U.S. Tax Convention”), that
are applicable and, in each case, as in effect and available, as of the date of
this document. Any of the authorities on which this summary is based
could be changed in a material and adverse manner at any time, and any such
change could be applied on a retroactive basis or prospective basis which could
affect the U.S. federal income tax considerations described in this
summary. This summary does not discuss the potential effects, whether
adverse or beneficial, of any proposed legislation that, if enacted, could be
applied on a retroactive or prospective basis.
U.S.
Holders
For
purposes of this summary, the term "U.S. Holder" means a beneficial owner of
Units, Common Shares, Warrants or Warrant Shares acquired pursuant to this
document that is for U.S. federal income tax purposes:
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an
individual who is a citizen or resident of the
U.S.;
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a
corporation (or other entity taxable as a corporation for U.S. federal
income tax purposes) organized under the laws of the U.S., any state
thereof or the District of
Columbia;
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an
estate whose income is subject to U.S. federal income taxation regardless
of its source; or
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a
trust that (1) is subject to the primary supervision of a court within the
U.S. and the control of one or more U.S. persons for all substantial
decisions or (2) has a valid election in effect under applicable Treasury
regulations to be treated as a U.S.
person.
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Non-U.S.
Holders
For
purposes of this summary, a “non-U.S. Holder” is a beneficial owner of Units,
Common Shares, Warrants or Warrant Shares that is not a U.S.
Holder. This summary does not address the U.S. federal income tax
consequences to non-U.S. Holders arising from and relating to the acquisition,
ownership, and disposition of Units, Common Shares, Warrants and Warrant
Shares. Accordingly, a non-U.S. Holder should consult its own tax
advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S.
federal estate and gift, U.S. state and local, and foreign tax consequences
(including the potential application of and operation of any income tax
treaties) relating to the acquisition, ownership, and disposition of Units,
Common Shares, Warrants and Warrant Shares.
U.S. Holders Subject to
Special U.S. Federal Income Tax Rules Not Addressed
This
summary does not address the U.S. federal income tax considerations applicable
to U.S. Holders that are subject to special provisions under the Code, including
the following: (a) U.S. Holders that are tax-exempt organizations,
qualified retirement plans, individual retirement accounts, or other
tax-deferred accounts; (b) U.S. Holders that are financial institutions,
underwriters, insurance companies, real estate investment trusts, or regulated
investment companies; (c) U.S. Holders that are dealers in securities or
currencies or U.S. Holders that are traders in securities that elect to apply a
mark-to-market accounting method; (d) U.S. Holders that have a “functional
currency” other than the U.S. dollar; (e) U.S. Holders that own Units, Common
Shares, Warrants or Warrant Shares as part of a straddle, hedging transaction,
conversion transaction, constructive sale, or other arrangement involving more
than one position; (f) U.S. Holders that acquired Units, Common Shares, Warrants
or Warrant Shares in connection with the exercise of employee stock options or
otherwise as compensation for services; (g) U.S. Holders that hold Units, Common
Shares, Warrants or Warrant Shares other than as a capital asset within the
meaning of Section 1221 of the Code (generally, property held for investment
purposes); (h) partnerships and other pass-through entities (and investors in
such partnerships and entities); or (i) U.S. Holders that own or have
owned (directly, indirectly, or by attribution) 10% or more of the
total combined voting power of the outstanding shares of the
Company. This summary also does not address the U.S. federal income
tax considerations applicable to U.S. Holders who are (a) U.S. expatriates or
former long-term residents of the U.S., (b) persons that have been, are, or will
be a resident or deemed to be a resident in Canada for purposes of the Tax Act;
(c) persons that use or hold, will use or hold, or that are or will be deemed to
use or hold Units, Common Shares, Warrants or Warrant Shares in connection with
carrying on a business in Canada; (d) persons whose Units, Common Shares,
Warrants or Warrant Shares constitute “taxable Canadian property” under the Tax
Act; or (e) persons that have a permanent establishment in Canada for the
purposes of the Canada-U.S. Tax Convention. U.S. Holders that are
subject to special provisions under the Code, including U.S. Holders described
immediately above, should consult their own tax advisor regarding the U.S.
federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S.
state and local, and foreign tax consequences relating to the acquisition,
ownership and disposition of Units, Common Shares, Warrants or Warrant
Shares.
U.S.
Federal Income Tax Consequences of the Acquisition of Units
For U.S.
federal income tax purposes, the acquisition by a U.S. Holder of a Unit will be
treated as the acquisition of an “investment unit” consisting of two
components: a component consisting of one Common Share and a
component consisting of one Common Share and 0.65 of a Common Share purchase
warrant. The purchase price for each Unit will be allocated between
these two components in proportion to their relative fair market values at the
time the Unit is purchased by the U.S. Holder. This allocation of the
purchase price for each Unit will establish a U.S. Holder’s initial tax basis
for U.S. federal income tax purposes in the one Common Share and 0.65 of a
Common Share purchase warrant that comprise each Unit.
For this
purpose, the Company will allocate Cdn.$0.20 of the purchase price for the Unit
to the Common Share and Cdn$0.08 of the purchase price for each Unit to the 0.65
of a Common Share purchase warrant. However, the IRS will not be
bound by the Company’s allocation of the purchase price for the Units, and
therefore, the IRS or a U.S. court may not respect the allocation set forth
above. Each U.S. Holder should consult its own tax advisor regarding
the allocation of the purchase price for the Units.
U.S.
Federal Income Tax Consequences of the Exercise and Disposition of
Warrants
Exercise of
Warrants
A U.S.
Holder should not recognize gain or loss on the exercise of a Warrant and
related receipt of a Warrant Share (unless cash is received in lieu of the
issuance of a fractional Warrant Share). A U.S. Holder’s initial tax
basis in the Warrant Share received on the exercise of a Warrant should be equal
to the sum of (a) such U.S. Holder’s tax basis in such Warrant plus (b) the
exercise price paid by such U.S. Holder on the exercise of such
Warrant. Subject to the “passive foreign investment company” (or
“PFIC”, as defined below) rules discussed below, a U.S. Holder’s holding period
for the Warrant Share received on the exercise of a Warrant should begin on the
date that such Warrant is exercised by such U.S. Holder.
Disposition of
Warrants
A U.S.
Holder will recognize gain or loss on the sale or other taxable disposition of a
Warrant in an amount equal to the difference, if any, between (a) the amount of
cash plus the fair market value of any property received and (b) such U.S.
Holder’s tax basis in the Warrant sold or otherwise disposed
of. Subject to the PFIC rules discussed below, any such gain or loss
generally will be a capital gain or loss (provided that the Warrant Share to be
issued on the exercise of such Warrant would have been a capital asset within
the meaning of Section 1221 of the Code if acquired by the U.S. Holder), which
will be long-term capital gain or loss if the Warrant is held for more than one
year.
Expiration of Warrants
Without Exercise
Subject
to the PFIC rules discussed below, upon the lapse or expiration of a Warrant, a
U.S. Holder will recognize a loss in an amount equal to such U.S. Holder’s tax
basis in the Warrant. Any such loss generally will be a capital loss
and will be long-term capital loss if the Warrants are held for more than one
year. Deductions for capital losses are subject to complex
limitations under the Code.
Certain Adjustments to the
Warrants
Under
Section 305 of the Code, an adjustment to the number of Warrant Shares that will
be issued on the exercise of the Warrants, or an adjustment to the exercise
price of the Warrants, may be treated as a constructive distribution to a U.S.
Holder of the Warrants if, and to the extent that, such adjustment has the
effect of increasing such U.S. Holder’s proportionate interest in the “earnings
and profits” or assets of the Company, depending on the circumstances of such
adjustment (for example, if such adjustment is to compensate for a distribution
of cash or other property to shareholders of the Company). (See more
detailed discussion of the rules applicable to distributions made by the Company
at “U.S. Federal Income Tax Consequences of the Acquisition, Ownership, and
Disposition of Common Shares and Warrant Shares – Distributions on Common Shares
and Warrant Shares” below).
U.S.
Federal Income Tax Consequences of the Acquisition, Ownership, and Disposition
of Common Shares and Warrant Shares
The
following discussion is subject to the rules described below under the heading
“Passive Foreign Investment Company Rules.”
Distributions on Common
Shares and Warrant Shares
Subject
to the PFIC rules discussed below, a U.S. Holder that receives a distribution,
including a constructive distribution, with respect to a Common Share or Warrant
Share will be required to include the amount of such distribution in gross
income as a dividend (without reduction for any Canadian income tax withheld
from such distribution) to the extent of the current or accumulated “earnings
and profits” of the Company, as computed for U.S. federal income tax
purposes. A dividend generally will be taxed to a U.S. Holder at
ordinary income tax rates. To the extent that a distribution exceeds
the current and accumulated “earnings and profits” of the Company, such
distribution will be treated first as a tax-free return of capital to the extent
of a U.S. Holder's tax basis in the Common Shares or Warrant Shares and
thereafter as gain from the sale or exchange of such Common Shares or Warrant
Shares. (See “ Sale or Other Taxable Disposition of Common Shares
and/or Warrant Shares” below). However, the Company does not intend
to maintain the calculations of earnings and profits in accordance with U.S.
federal income tax principles, and each U.S. Holder should therefore assume that
any distribution by the Company with respect to the Common Shares or Warrant
Share will constitute ordinary dividend income. Dividends received on
Common Shares or Warrant Shares generally will not be eligible for the
“dividends received deduction”.
For tax
years beginning before January 1, 2011, a dividend paid to a U.S. Holder who is
an individual, estate or trust by the Company generally will be taxed at the
preferential tax rates applicable to long-term capital gains if the Company is a
“qualified foreign corporation” as defined under Section 1(h)(11) of the Code (a
“QFC”) and certain holding period requirements for the Common Shares or Warrant
Shares are met. The Company generally will be a QFC if the Company is
eligible for the benefits of the Canada-U.S. Tax Convention or the Common Shares
or Warrant Shares are readily tradable on an established securities market in
the U.S. However, even if the Company satisfies one or more of these
requirements, the Company will not be treated as a QFC if the Company is a PFIC
for the tax year during which it pays a dividend or for the preceding tax
year. (See the section below under the heading “Passive Foreign
Investment Company Rules”).
If a U.S.
Holder fails to qualify for the preferential tax rates discussed above, a
dividend paid by the Company to a U.S. Holder generally will be taxed at
ordinary income tax rates (and not at the preferential tax rates applicable to
long-term capital gains). The dividend rules are complex, and each
U.S. Holder should consult its own tax advisor regarding the application of such
rules.
Sale or Other Taxable
Disposition of Common Shares and/or Warrant Shares
Subject
to the PFIC rules discussed below, upon the sale or other taxable disposition of
Common Shares or Warrant Shares, a U.S. Holder generally will recognize capital
gain or loss in an amount equal to the difference between (i) the amount of cash
plus the fair market value of any property received and (ii) such U.S. Holder’s
tax basis in such Common Shares or Warrant Shares sold or otherwise disposed
of. Subject to the PFIC rules discussed below, gain or loss
recognized on such sale or other disposition generally will be long-term capital
gain or loss if, at the time of the sale or other disposition, the Common Shares
or Warrant Shares have been held for more than one year.
Preferential
tax rates apply to long-term capital gain of a U.S. Holder that is an
individual, estate, or trust. There are currently no preferential tax
rates for long-term capital gain of a U.S. Holder that is a
corporation. Deductions for capital losses are subject to significant
limitations under the Code.
Passive
Foreign Investment Company Rules
If the
Company were to constitute a PFIC (as defined below) for any year during a U.S.
Holder’s holding period, then certain different and potentially adverse tax
consequences would apply to such U.S. Holder’s acquisition, ownership and
disposition of Units, Common Shares, Warrants, and Warrant Shares.
The
Company generally will be a PFIC under Section 1297 of the Code if, for a
taxable year, (a) 75% or more of the gross income of the Company for such
taxable year is passive income or (b) 50% or more of the assets held by the
Company either produce passive income or are held for the production of passive
income, based on the quarterly average of the fair market value of such
assets. “Gross income” generally means all revenues less the cost of
goods sold, and “passive income” includes, for example, dividends, interest,
certain rents and royalties, certain gains from the sale of stock and
securities, and certain gains from commodities transactions. Active
business gains arising from the sale of commodities generally are excluded from
passive income if substantially all of a foreign corporation’s commodities are
(a) stock in trade of such foreign corporation or other property of a kind which
would properly be included in inventory of such foreign corporation, or property
held by such foreign corporation primarily for sale to customers in the ordinary
course of business, (b) property used in the trade or business of such foreign
corporation that would be subject to the allowance for depreciation under
Section 167 of the Code, or (c) supplies of a type regularly used or consumed by
such foreign corporation in the ordinary course of its trade or
business.
In
addition, for purposes of the PFIC income test and asset test described above,
if the Company owns, directly or indirectly, 25% or more of the total value of
the outstanding shares of another corporation, the Company will be treated as if
it (a) held a proportionate share of the assets of such other corporation and
(b) received directly a proportionate share of the income of such other
corporation. In addition, for purposes of the PFIC income test and
asset test described above, “passive income” does not include any interest,
dividends, rents, or royalties that are received or accrued by the Company from
a “related person” (as defined in Section 954(d)(3) of the Code), to the extent
such items are properly allocable to the income of such related person that is
not passive income.
Under
certain attribution rules, if the Company is a PFIC, U.S. Holders will be deemed
to own their proportionate share of any subsidiary of the Company which is also
a PFIC (a ‘‘Subsidiary PFIC’’), and will be subject to U.S. federal income tax
on (i) a distribution on the shares of a Subsidiary PFIC or (ii) a disposition
of shares of a Subsidiary PFIC, both as if the holder directly held the shares
of such Subsidiary PFIC.
The
Company does not believe that it was a PFIC for the tax year ended December 31,
2009, and based on current business plans and financial expectations, the
Company does not expect to be a PFIC for the current tax year. The
determination of whether the Company will be a PFIC for a taxable year depends,
in part, on the application of complex U.S. federal income tax rules, which are
subject to differing interpretations. In addition, whether the
Company will be a PFIC for its current taxable year depends on the assets and
income of the Company over the course of each such taxable year and, as a
result, cannot be predicted with certainty as of the date of this communication.
Consequently, there can be no assurance regarding the Company’s PFIC status for
any taxable year, and there can be no assurance that the IRS will not challenge
the determination made by the Company concerning its PFIC
status.
Under the
default PFIC rules, a U.S. Holder would be required to treat any gain recognized
upon a sale or disposition of our Units, Common Shares, Warrants, or Warrant
Shares as ordinary (rather than capital), and any resulting U.S. federal income
tax may be increased by an interest charge which is not deductible by
non-corporate U.S. Holders. Rules similar to those applicable to
dispositions will generally apply to distributions in respect of our Common
Shares or Warrant Shares which exceed a certain threshold level.
While
there are U.S. federal income tax elections that sometimes can be made to
mitigate these adverse tax consequences (including, without limitation, the “QEF
Election” and the “Mark-to-Market Election”), such elections are available in
limited circumstances and must be made in a timely manner. Under
proposed Treasury Regulations, if a U.S. holder has an option, warrant, or other
right to acquire stock of a PFIC (such as the Units or the Warrants), such
option, warrant or right is considered to be PFIC stock subject to the default
rules of Section 1291 of the Code. However, the holding period for
the Warrant Shares will begin on the date a U.S. Holder acquires the
Units. This will impact the availability of the QEF Election and
Mark-to-Market Election with respect to the Warrant Shares. Thus, a
U.S. Holder will have to account for Warrant Shares and Common Shares under the
PFIC rules and the applicable elections differently. U.S. Holders are
urged to consult their own tax advisers regarding the potential application of
the PFIC rules to the ownership and disposition of Units, Common Shares,
Warrants, and Warrant Shares, and the availability of certain U.S. tax elections
under the PFIC rules.
U.S.
Holders should be aware that, for each taxable year, if any, that the Company or
any Subsidiary PFIC is a PFIC, the Company can provide no assurances that it
will satisfy the record keeping requirements of a PFIC, or that it will make
available to U.S. Holders the information such U.S. Holders require to make a
QEF Election under Section 1295 of the Code with respect of the Company or any
Subsidiary PFIC. Each U.S. Holder should consult its own tax advisor
regarding the availability of, and procedure for making, a QEF Election with
respect to the Company and any Subsidiary PFIC.
Subject
to certain specific rules, foreign income and withholding taxes paid with
respect to any distribution in respect of stock in a PFIC should qualify for the
foreign tax credit. The rules relating to distributions by a PFIC are
complex, and a U.S. Holder should consult with its own tax advisor with respect
to any distribution received from a PFIC.
Additional
Considerations
Receipt of Foreign
Currency
The
amount of any distribution paid to a U.S. Holder in foreign currency or on the
sale, exchange or other taxable disposition of Common Shares, Warrants or
Warrant Shares generally will be equal to the U.S. dollar value of such foreign
currency based on the exchange rate applicable on the date of receipt
(regardless of whether such foreign currency is converted into U.S. dollars at
that time). If the foreign currency received is not converted into
U.S. dollars on the date of receipt, a U.S. Holder will have a basis in the
foreign currency equal to its U.S. dollar value on the date of
receipt. Any U.S. Holder who receives payment in foreign currency and
engages in a subsequent conversion or other disposition of the foreign currency
may have a foreign currency exchange gain or loss that would be treated as
ordinary income or loss, and generally will be U.S. source income or loss for
foreign tax credit purposes. Each U.S. Holder should consult its own
U.S. tax advisor regarding the U.S. federal income tax consequences of
receiving, owning, and disposing of foreign currency.
Foreign Tax
Credit
Subject
to the PFIC rules discussed above, a U.S. Holder who pays (whether directly or
through withholding) Canadian income tax with respect to dividends paid on the
Common Shares and Warrant Shares generally will be entitled, at the election of
such U.S. Holder, to receive either a deduction or a credit for such Canadian
income tax paid. Generally, a credit will reduce a U.S. Holder’s U.S.
federal income tax liability on a dollar-for-dollar basis, whereas a deduction
will reduce a U.S. Holder’s income subject to U.S. federal income tax. This
election is made on a year-by-year basis and applies to all foreign taxes paid
(whether directly or through withholding) by a U.S. Holder during a
year.
Complex
limitations apply to the foreign tax credit, including the general limitation
that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S.
federal income tax liability that such U.S. Holder’s “foreign source” taxable
income bears to such U.S. Holder’s worldwide taxable income. In
applying this limitation, a U.S. Holder’s various items of income and deduction
must be classified, under complex rules, as either “foreign source” or “U.S.
source.” Generally, dividends paid by a foreign corporation should be
treated as foreign source for this purpose, and gains recognized on the sale of
stock of a foreign corporation by a U.S. Holder should be treated as U.S. source
for this purpose, except as otherwise provided in an applicable income tax
treaty, and if an election is properly made under the Code. However,
the amount of a distribution with respect to the Common Shares or Warrant Shares
that is treated as a “dividend” may be lower for U.S. federal income tax
purposes than it is for Canadian federal income tax purposes, resulting in a
reduced foreign tax credit allowance to a U.S. Holder. In addition,
this limitation is calculated separately with respect to specific categories of
income. The foreign tax credit rules are complex, and each U.S.
Holder should consult its own U.S. tax advisor regarding the foreign tax credit
rules.
Information Reporting;
Backup Withholding Tax
Under
U.S. federal income tax law and Treasury regulations, certain categories of U.S.
Holders must file information returns with respect to their investment in, or
involvement in, a foreign corporation. For example, recently enacted
legislation generally imposes new U.S. return disclosure obligations (and
related penalties) on U.S. Holders that hold certain specified foreign financial
assets in excess of $50,000. The definition of specified foreign
financial assets includes not only financial accounts maintained in foreign
financial institutions, but also, unless held in accounts maintained by a
financial institution, any stock or security issued by a non-U.S. person, any
financial instrument or contract held for investment that has an issuer or
counterparty other than a U.S. person and any interest in a foreign
entity. U. S. Holders may be subject to these reporting requirements
unless their Units, Common Shares, Warrants, and Warrant Shares are held in an
account at a domestic financial institution. Penalties for failure to
file certain of these information returns are substantial. U.S.
Holders should consult with their own tax advisors regarding the requirements of
filing information returns, and, if applicable, filing obligations relating to a
Mark-to-Market or QEF Election.
Payments
made within the U.S., or by a U.S. payor or U.S. middleman, of dividends on, and
proceeds arising from the sale or other taxable disposition of the Units, Common
Shares, Warrants, and Warrant Shares generally may be subject to information
reporting and backup withholding tax, at the rate of 28% (and increasing to 31%
for payments made after December 31, 2010), if a U.S. Holder (a) fails to
furnish such U.S. Holder’s correct U.S. taxpayer identification number
(generally on Form W-9), (b) furnishes an incorrect U.S. taxpayer identification
number, (c) is notified by the IRS that such U.S. Holder has previously failed
to properly report items subject to backup withholding tax, or (d) fails to
certify, under penalty of perjury, that such U.S. Holder has furnished its
correct U.S. taxpayer identification number and that the IRS has not notified
such U.S. Holder that it is subject to backup withholding
tax. However, certain exempt persons generally are excluded from
these information reporting and backup withholding tax rules. Any
amounts withheld under the U.S. backup withholding tax rules will be allowed as
a credit against a U.S. Holder’s U.S. federal income tax liability, if any, or
will be refunded, if such U.S. Holder furnishes required information to the IRS
in a timely manner. Each U.S. Holder should consult its own tax
advisor regarding the information reporting and backup withholding tax
rules.
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