19 September 2007 External T.I. 2007-0252761E5 - Canadian exploration expense

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.

Principal Issues: Whether CRA would publish its position on whether community consultation, feasibility and environmental study costs incurred by mining companies at the exploration stage will be included in CEE under paragraph (f) of that definition.

Position: Guidelines have been provided

Reasons: Actual determination will depend on the facts of a particular situation

2007-025276
XXXXXXXXXX T. Harris
(613) 957-2114
September 19, 2007

Dear XXXXXXXXXX:

Re: Canadian Exploration Expenses

XXXXXXXXXX the Canada Revenue Agency ("CRA") clarify its interpretation of the circumstances in which community consultation expenses, environmental study expenses and feasibility study expenses that are incurred by mining companies at the exploration stage will qualify as Canadian exploration expenses ("CEE") within the meaning of subsection 66.1(6) of the Income Tax Act. In order for any such expenditure to qualify as CEE, it must be incurred for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada (referred to in the attached table as the "purpose test").

The CRA has been aware of the mining industry's interest in this issue; however, to date we have not had many occasions to consider whether consultation expenses, environmental study expenses or feasibility study expenses incurred by a mining exploration company will qualify as CEE in an actual fact situation. Consequently, our consideration of this issue has been limited to an overall review of general principles. For this reason, the CRA can only provide the mining industry with general guidelines that it will follow in determining whether these types of expenditures that are incurred by mining companies at the exploration stage (i.e. for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada) will qualify as CEE. A copy of these guidelines, which have been prepared in consultation with Natural Resources Canada and Finance Canada, is included in the attached table, XXXXXXXXXX,

As noted in the attached table, the actual treatment of a particular expense incurred by a taxpayer will depend on the particular facts of a given situation and, therefore, may differ from that outlined in the table.

Yours truly,

Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

cc. Mr. Robert Clark, A/Director General

Economics, Investment and Fiscal Analysis Branch
Natural Resources Canada

Ms Mara Praulins, Director General
Audit Professional Services Directorate
Compliance Programs Branch
Canada Revenue Agency

Ms Jane Stalker, Coordinator, Resource Industries
Industry Specialist Services
Compliance Programs Branch
Canada Revenue Agency

Guidelines for Determining the Tax Treatment of Certain Exploration Expenses

Note: This table has been prepared to provide the guidelines that the Canada Revenue Agency (CRA) will follow in determining whether environmental study expenses, community consultation expenses and feasibility study expenses that are incurred by mining companies at the exploration stage (i.e. for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada, hereinafter referred to as the "purpose test") will qualify as Canadian exploration expenses ("CEE"). The table is intended as a guide only. The actual treatment of a particular expense incurred by a taxpayer will depend on the facts relevant to the particular situation and, therefore, may differ from that outlined in this table.

Issue			Description of Expense				Guideline 

Environmental studies 	Environmental assessments 			Not CEE as it is part of
			undertaken to meet a legal or			the cost of a Canadian
			informal requirement to obtain			Resource Property (CRP)
			a permit.					which is Canadian
									Development Expense (CDE)

			Environmental assessments			CEE where related to
			undertaken to meet a legal or			the permit providing
			informal obligation under the			for the exploration
			terms of the permit.				process (not part of
									the cost of a CRP)

Other environmental assessments
conducted at the discretion of the taxpayer:

	 		-  environmental sampling/monitoring		CEE
			in relation to an exploration activity;

			-  targeted environmental assessments		CEE
			e.g., vegetation, fisheries and water
			assessments) conducted in conjunction
			with a specific exploration activity;

			-  general baseline environmental 		Not CEE
			assessments undertaken prior to carrying	(does not meet
			out a specific exploration activity.		purpose test)

Community consultation	Consultation to assess community 		Not CEE
			attitudes/community information			(does not meet
			program, undertaken prior to a			purpose test)
			decision to explore.

			Consultation undertaken to meet a		CDE (part of
			legal or informal requirement to		the cost of a
			obtain a permit.				CRP)

			Consultation undertaken to meet a 		CEE where
			egal or informal obligation under		related to the
			the terms of the permit.			permit providing
									for the exploration 
									process (not part of
									the cost of a CRP)

			Negotiation to secure surface access 		CEE (where
			for exploration purposes (beyond the		incurred in relation
			requirements for/of the permit).		to the exploration
									process and not a
									broader purpose)

			Negotiation with local community to 		CEE (not part of
			secure certainty with respect to 		the cost of a CRP)
			exploration operations (additional to
			requirement for/of a permit and where
			other party does not hold surface rights).

Other consultation undertaken at the

taxpayer's discretion in respect of the:

			-  exploration process only;			CEE

			-  exploration and mining process;		CEE to the extent
									the expense meets
									purpose test

Feasibility studies	Preliminary planning for a potential 		Not CEE (does not
			exploration activity undertaken prior 		meet purpose test)
			to a decision to explore.

			Planning for, and studies relating to, 		CEE
			the conduct of an exploration activity
			or some part thereof.

			Physical and chemical assessments 		CEE
			related to a deposit, with the objective
			of informing a decision whether to
			undertake more advanced exploration
			at the site.

			Assessments of the physical and 			CEE
			chemical characteristics of the deposit
			to assess its potential as a commercial
			deposit.

			Assessments of mine development 		Not CEE (does not
			options and/or profitability of 		meet purpose test)
			developing the deposit into a mine.