14 September 1989 Ruling 58421 F - Renunciation of Resource Expenditures Incurred Prior to the Date of an Agreement in Writing

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

September 14, 1989

Dear Sirs:

Re:  Agreement in writing Paragraph 66(15)(d.1) of the Income Tax Act (the "Act")

This is in reply to your letter dated July 19, 1989, in which you requested our opinion regarding our interpretation of paragraph 66(l5)(d.1) of the Act as it relates to the issue of whether resource expenditures incurred prior to the date on which an agreement is entered into in writing can be renounced pursuant to the flow-through share provisions of the Act.

Your Views

For this purpose you provided us with your views on the matter which are as follows:

It is your view the words used in the preamble of paragraph 66(15)(d.l) of the Act, i.e. "issued to a person pursuant to an agreement in writing entered into ... after February 1986, ...", indicate two (2) actions which must occur in order for a share to qualify as a flow-through share.  Firstly an agreement must be entered into and secondly, the agreement must be in writing.

You noted that subparagraph 66(l5)(d.1)(i) of the Act requires that the expenditures incurred under the agreement for renunciation purposes commence on the day the agreement was entered into.  It is your understanding that "the day the agreement was entered into..." for purposes of subparagraph 66(15)(d.1)(i)of the Act, is the day the parties have come to an agreement whether it is in writing on that particular day or in writing at some later day.  However, you assert the shares must be issued "pursuant to an agreement in writing..." per the words in the preamble of paragraph 66(15)(d.1) of the Act.

You conclude from your analysis of the foregoing that an expenditure incurred (during the period between entering into an agreement - presumably at such time when "the meeting of the minds" occurs, and having the agreement put into a written form) will be available for renunciation since it was incurred during the period commencing on the date the agreement (when the "meeting of the minds" took place) was entered into.

Comments

We do not share your interpretation of the said paragraph.

It is our view that "an agreement in writing" is precisely that, i.e. a "written agreement" and nothing less.  Paragraph 66(l5)(d.l) of the Act requires that this "written agreement" exist between the principal-business corporation and the purchaser of the flow-through share prior to the date the resource expenditures are incurred.  This written agreement must not only reflect the intention of the parties but must be legally binding upon both of them.  Although letters of intent or other similar writings may depict the parties intentions, in most situations they do not legally bind the parties and therefore in our view are not contemplated by paragraph 66(I5)(d.1) of the Act.

In addition, with regards to the particular areas of the Act dealing with the "flow through" of CEE, CDE and C0GPE, being subsections 66(12.6), (12.62) and (12.64) of the Act respectively, such provisions reiterate the above requirement in order for such expenses to "flow through" to a shareholder.

The aforesaid subsections may be paraphrased as follows in stating the requirement as to when a principal-business corporation has to incur the various expenses so that they qualify for "flow through" purposes:

     "... and, during the period commencing on the day the agreement was entered into and ending 24 months after the end of the month that included that day, the corporation has incurred (the specific expense), the corporation may..., renounce,..., by which those expenses incurred by it during that period...".

In other words, the Act requires these expenses to be incurred by the corporation subsequent to entering into the agreement referred to in paragraph 66(l5)(d.l) of the Act, which is a written agreement that is legally binding upon both of the parties, in order for these expenses to be capable of "flowing through" to the holders of the flow-through shares.

The above comments are only expressions of opinion and as such should not be construed as advance income tax rulings, nor are they binding on the Department.

ChiefResource IndustriesBilingual Services and ResourceIndustries DivisionRulings Directorate