14 June 1994 9410321 - RIGHT OF RESCISSION AND FLOW-THROUGH SHARES

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Issue Sheet

A.A. Cameron
June 14, 1994
941032

Question

Question 12 for the round table at the June 1994 conference of the Canadian Petroleum Tax Society concerned whether the interpretation of paragraph 6202.1(1)(b) of the Regulations should be restricted so that the contractual rights of rescission found in most securities laws in Canada, and arising where a misrepresentation (of which the purchaser has no knowledge prior to the purchase of the shares) is made in a prospectus related to the issuance of shares, would not cause flow-through shares issued thereunder to be considered "prescribed shares", and therefore not eligible as flow-through shares, for the purposes of the Income Tax Act?

Our Response

It remains a question of fact, to be determined from the relevant facts of a particular situation, whether or not a share would be a "prescribed share" under section 6202.1 of the Regulations at the time it is issued. However, the fact that such a right of rescission may contingently arise under the provisions of the securities law of the relevant Canadian jurisdiction, and due to factors unknown to the purchaser of the share at the time of purchase, would generally not, in and by itself, cause the share to be so "prescribed".

Discussion

In Black's law dictionary, sixth edition, it is indicated with reference to the phrase "rescission of contract" that:

The right of rescission is the right to cancel (rescind) a contract upon the occurrence of certain kinds of default by the other contracting party.

It would appear that a "right of rescission" may arise either expressly, due to the terms of a particular contract or agreement or due to "external" factors, e.g., rights given by various laws of the governing jurisdiction, an order from the Courts, etc.. A "right of rescission" given expressly between the parties to a flow-through share agreement would likely cause a share issued thereunder to be "prescribed" pursuant to paragraph 6202.1(1)(b) of the Regulations.

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It would appear that virtually any agreement or contract would be subject to the possibility of a "right of rescission" arising due to "external" factors, i.e., the laws of the relevant jurisdiction. Therefore, in our view, it will be a question of fact whether the existence of such a contingency would offend the provisions of section 6202.1 of the Regulations.

In our opinion, the above described contractual rights of rescission which would be found in most securities laws in Canada in respect of misrepresentations in a prospectus related to the issuance of flow-through shares will, in and by themselves, generally not result in the shares being "prescribed" by virtue of paragraph 6202.1(1)(b) of the Regulations. (

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In addition, see file #5-1851 for a discussion concerning the effect of a "condition precedent" upon the date of disposition of property.)