6 December 1989 Income Tax Severed Letter ACC8847 F - Canadian Exploration Expenses - 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.

Director General Rulings Directorate Legislative and Intergovernmental Affairs Branch Revenue Canada, Taxation 88 Metcalfe Street Ottawa, OntarioK1A 0L8

Attention:  Mr. Frank Gillman

Re:  24(1)

Dear Frank:

24(1)

24(1)

Paragraph 66(15)(d.1) of the Act states that flow-through shares must be issued "pursuant to an agreement in writing...under which the corporation agrees to incur, during the period commencing on the day the agreement was entered into...Canadian Exploration Expenses..." We understand your views to be that the reference to the words "an agreement in writing" in paragraph 66(15)(d.1) of the Act refers to a binding agreement and you feel the above conditions may preclude the agreement from binding the Partnership until they are realized.

We would like to say at the outset that the only requirement of paragraph 66(15)(d.1) is that there be an agreement in writing.  An agreement in writing can be in existence even though it contains conditions, whether they be precedent or subsequent. We have reviewed the common law as well as the civil law that applies in this area. It is clear that the reservation of the above-mentioned right, at common law, is a condition subsequent to the making of the contract between the Public Resource Company and the Partnership. In other words, the contract comes into force immediately upon signing of the subscription agreement, has full effect and is binding on the parties.

The difference between a condition precedent and a condition subsequent is explained as follows in "The Law of Contract in Canada", by G.H.L. Fridman:

     "Prior to the English Sale of Goods Act of 1893...the expression condition was employed by the courts to refer to a term in a contract by virtue of which the contract could be postponed, so far as its taking effect was concerned, unless or until a certain event or occurrence took place, or could be rendered invalid and non-binding as initio, if a certain event or occurrence happened.  The former types of condition were called "conditions precedent", the latter "conditions subsequent".  An alternative form of language was to refer to the former class of conditions as suspensive (because they acted to suspend the potential operation of the contract), and the latter resolutive (because they acted to dissolve or render ineffective a contract that had already become operative)." (p. 272-273)

     "...A similar situation can arise with respect to a condition subsequent, as shown by the case of Smallman v. Smallman. There an agreement between a husband and a wife, in the process of separating and divorcing, under which the husband was making a settlement with the wife, was said to be "subject to approval" by the court. It was held that there was a binding agreement right away, but it became invalid if the court did not approve." (p. 274)

24(1) It would be impossible to accept the notion that any contract which depends to some extent on the realization of a fixed event is not in fact a binding contract.  It has been clearly established that a contract can validly subsist despite the existence of a condition as long as the party who has the obligation to have the condition satisfied seeks in good faith to do so. 24(1)

The civil law arrives at the same conclusion by distinguishing between resolutory and suspensive conditions.  A contract with a suspensive condition effectively suspends the performance of the obligations under a contract until the realization of a given condition:

     "Avant l'arrivée de la condition, l'obligation n'existe que potentiellement mais pas encore réellement.  Sa création demeure une simple éventualité et aucun lien effectif ne lie encore le futur créancier et le futur débiteur. Le créancier conditionnel n'a donc en principe aucun droit contre son débiteur conditionnel. Il ne possède aucun intérêt juridique né et actuel qui lui permettrait de requérir, par example. l'exécution de l'obligation." (Jean-Louis Beaudoin: Les Obligations, Les Editions Yvon Blais Inc., 1983, Cowansville, Québec, p.447)

To this extent, the only legal obligation between the parties until such time as the event materializes is the obligation to refrain from frustrating the happening of the event.  This is presently not the case.

A resolutory condition on the other hand makes the contract a binding agreement from the date of its coming into force while providing for the possibility that it may be cancelled in the event the condition materializes:

     "Lorsque l'obligation est contractée sous condition résolutoire, elle est immédiatement en existence. Le créancier a donc, comme le créancier d'une obligation pure et simple, le droit de requérir du débiteur l'exécution de l'obligation. Il peut du plus, le cas échéant, alinéner l'objet, l'hypothéquer et l'utiliser généralement comme bon lui semble, étant dans une position juridique identique à celle d'un créancier ordinaire, avec la réserve toutefois que son droit peut être anéanti par la réalisation de la condition." (Les Obligations, ibid, p.449)

24(1)

Trusting the whole to be satisfactory, we remain.

Yours very truly,

19(1)