9 April 2013 Internal T.I. 2012-0480021I7 - Section 35--Prospectors

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: Would the terms of an agreement relating to the granting of an option by a prospector to a corporation result in the prospector disposing of a mineral property or interest therein?

Position: Yes.

Reasons: Wording of section 35 and case law.

April 9, 2013

Compliance Programs Branch HEADQUARTERS
Business Audit Division Income Tax Rulings
Technical Section Directorate
XXXXXXXXXX L. Zannese
613) 941-0782

2013-048002

Prospectors and Grubstakers shares

We are writing in response to your request for our views as to whether the granting of an option would be a "disposition of a mining property or interest therein" for purposes of section 35 of the Income Tax Act (the "Act"). The issue arises as part of an audit of XXXXXXXXXX ("Mr. X") who is currently under audit by the XXXXXXXXXX Tax Services office. You attached copies of two agreements entered into between Mr. X and certain mining corporations. You also sent us the email from XXXXXXXXXX, Industry Sector Specialist, wherein he explained his concerns with the applicability of section 35 to this particular situation.

FACTS

Based on the information that you provided to us, our understanding of the facts is as follows:

• For the taxation years under audit, Mr. X operated as a prospector and staked over XXXXXXXXXX mining claims in XXXXXXXXXX.
• It is represented that Mr. X was the sole legal and beneficial holder of certain mining claims (the "Property").
• Mr. X entered into agreements (the "Agreement") with certain mining corporations under which Mr. X granted the particular mining corporation the sole and exclusive right and option to acquire a 100% interest in the Property, such option to be exercisable by the mining corporation agreeing to the following: a) making certain cash payments over a period of several years; b) incurring certain expenditures on the Property; and c) issuing its common shares to Mr. X over a period of several years. You have advised that the term of the Agreement was generally XXXXXXXXXX years.
• Until the exercise of the option, Mr. X represented that he would not, without the consent of the mining corporation, enter into any contract in respect of the Property and would maintain the Property unencumbered and in good standing.
• Under paragraph (XXXXXXXXXX) of the Agreement, while the agreement was in effect, the mining corporation had the right to conduct any and all exploration and development activities, including the collection of bulk samples, for the purpose of determining the viability of the Property.
• Under paragraph (XXXXXXXXXX) of the Agreement, upon the mining corporation exercising the option, Mr. X agreed to convey 100% undivided beneficial and legal interest in the Property to the mining corporation.
• For the XXXXXXXXXX taxation year, Mr. X used the provisions of section 35 to obtain a tax-deferral on the transactions involving the receipt of common shares under the Agreement.

OUR COMMENTS

Section 35 applies where shares of a corporation are received in a taxation year by an individual who is a prospector as consideration for the disposition by the individual to the corporation of a mining property or interest therein that was acquired by the individual as a result of the individual's efforts as a prospector. The terms "prospector", "mining property" and "mineral resource" are all defined in the Act. In particular, "mining property" is defined under subsection 35(2) as:

(a) a right, licence or privilege to prospect, explore, drill or mine for minerals in a mineral resource in Canada, or
(b) real property in Canada (other than depreciable property) the principal value of which depends on its mineral resource content.

As noted above, under paragraph (XXXXXXXXXX) of the Agreement, the mining corporation had the right to explore for minerals on the Property prior to the transfer of the legal and beneficial ownership of the Property. Further, until the exercise of the option, Mr. X could not enter into any contract with respect to the Property without the consent of the mining corporation. Accordingly, in our view, the terms and conditions under the Agreement resulted in a disposition of certain rights by Mr. X to the mining corporation. In this regard we note that the courts have held that, in certain situations, the granting of an option with respect to a mineral claim grants the holder of the option an equitable interest in the property (see the 1959 Supreme Court of Canada decision of Frobisher Limited v. Canadian Pipelines & Petroleums Limited [1960] S.C.R. 126).

Provided that the mining claims qualify as a "right to explore for minerals in a mineral resource in Canada", it is our view that the shares received by Mr. X from the mining corporation under the Agreement represented consideration for the disposition by Mr. X of a mining property, or interest therein. However, we agree with the concerns expressed by XXXXXXXXXX as to whether Mr. X satisfied the other requirements contained in section 35.

We trust that these comments will be of assistance.

Yours truly,

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