9 July 2012 External T.I. 2012-0452841E5 - Sale of a mining claim

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: 1. In the hypothetical case provided, what are the proceeds of disposition in respect of the sale of the corporation’s mining claim? 2. Does subsection 35(1) apply?

Position: 1. The POD is equal to the consideration received, in this case the total of cash and the market value of shares acquired in exchange for the claim. 2. No.

Reasons: 1. Question of fact. 2. Subsection 35(1) of the Act applies where an individual who is a prospector acquires shares of a corporation in exchange for the disposition to the corporation of an interest in a right, licence or privilege to prospect, explore, drill or mine for minerals in a mineral resource in Canada

XXXXXXXXXX
				2012-045284
				T. Posadovsky

July 9, 2012

Dear Mr. XXXXXXXXXX:

Re: Sale of a mining claim

This is in reply to your email of June 20, 2012, and our telephone conversation of June 21, 2012 (Posadovsky/XXXXXXXXXX), concerning the tax consequences of a sale of a mining claim for the purposes of the Income Tax Act (the “Act”).

You described a hypothetical situation where a Canadian corporation (“Canco”) sells a mining claim to a publicly listed mining company. In exchange for the mining claim, Canco receives as consideration cash and common shares of the mining company. In addition to the tax consequences resulting from the sale of the mining claim, you also asked how a subsequent sale of the common shares received should be reported by Canco.

Background

A mining claim is a parcel of Crown land in which a claim holder has the exclusive right to explore for minerals and the right to acquire a mining lease for the purpose of mining. Each province and territory in Canada has its own specific legislation regulating mining activities on Crown land, but in general, a claim holder in good standing must obtain a mining lease in order to proceed with the development of a property into a mine. The claim holder also has the right to transfer or sell the mining claim.

Assuming a mining claim is in respect of a “mineral” in a “mineral resource”, as both are defined in subsection 248(1) of the Act, such property of a taxpayer that is “any right, licence or privilege to... prospect, explore, drill or mine for minerals in a mineral resource in Canada” is “Canadian resource property” (“CRP”) by virtue of paragraph (b) of the definition in subsection 66(15) of the Act. The cost to a taxpayer of any property described in paragraph (b) or (e) of the definition of CRP in subsection 66(15), or any right to or interest in such property, is a “Canadian development expense” (“CDE”) pursuant to paragraph (e) of the definition of CDE in subsection 66.2(5) of the Act (subject to certain exceptions not relevant here).

Our Comments

As explained in Interpretation Bulletin IT-125R4, Dispositions of Resource Properties, the disposition of CRP is specifically excluded from capital gains treatment by subparagraph 39(1)(a)(ii) of the Act. Instead, the disposition of a mining claim that meets the definition of CRP results in a reduction to the taxpayer’s cumulative CDE pool, under element F of the definition of cumulative CDE in subsection 66.2(5). The amount of the reduction to cumulative CDE is equal to the proceeds of disposition less outlays or expenses made or incurred for the purpose of the disposition and that are not otherwise deductible for the purposes of Part I of the Act. If there is a credit balance in the cumulative CDE pool in respect of a taxation year, such a balance must be included in income, under paragraph 59(3.2)(c) and subsection 66.2(1) of the Act.

The term “proceeds of disposition” (“POD”) is defined in section 54 of the Act for capital gains purposes, and is also applicable in the context of dispositions of resource properties under subsections 59(5) and 66.4(5). The definition of POD includes, among other things, “the sale price of property that has been sold”. The expression “sale price” is not defined in the Act, but is generally accepted to mean the actual value of all consideration received by a seller from a buyer, including cash, property and/or the assumption of liabilities. The POD in any particular transaction must therefore be determined based on an examination of all the facts and circumstances of the case; however, where shares have been included in the POD, the courts generally look to the actual or market value at the time the shares were acquired.

Subsection 35(1) of the Act provides special rules where an individual prospector or grubstaker receives shares of the capital stock of a corporation in exchange for an interest in a mining property. Among other things, and subject to certain restrictions, section 35 allows for a deferral of the gain otherwise determined at the time of the disposition. However, the provisions under section 35 of the Act would not apply in this situation, because it involves a corporation, not an individual who is receiving shares of a corporation in exchange for an interest in a Canadian mining property.

You also inquired about the tax consequences of a subsequent sale by Canco of the shares of the mining company, where the market value of the shares at the time of disposition by Canco is greater than the market value at the time that they were acquired. In this case, the gain represented by any such increase in value may be fully includable in income, or may be a capital gain, one half of which is included in income for tax purposes. Whether such a gain would be on capital or income account is a determination that would have to be made based on the facts of a particular situation. More information on this topic can be found in IT-479R, Transactions in securities, available on our Web site at www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.html.

We trust that our comments will be of assistance.

Yours truly,

Fiona Harrison, C.A.
Manager
Resources Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch