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: Can a corporation that has incurred CEE and flowed out these expenses to its flow-through shareholders also make a claim for SR & ED with respect to the same expenses?
Position: No.
Reasons: The definition of SR & ED specifically excludes certain mining activities as qualifying for SR & ED. If expenditures undertaken in respect of such activities qualify as CEE then the expenses will not qualify as SR & ED due to the exclusion.
XXXXXXXXXX
2013-051219
B. Christov
(613) 946-5350
February 6, 2014
Dear XXXXXXXXXX:
Re: Mining Activities and Scientific Research & Experimental Development
We are writing in response to your request for an advance income tax ruling relating to whether expenditures that qualify as "Canadian exploration expense" ("CEE") within the meaning of subsection 66.1(6) of the Income Tax Act (the "Act") may also be eligible as an expenditure in respect of scientific research and experimental development ("SR&ED") for the purposes of the definition of "qualified expenditure" in subsection 127(9) of the Act. As explained to you during our telephone conversation, we are unable to provide you with an advance income tax ruling with respect to this situation. However, we will provide some general comments that we hope will be of assistance.
In order for an expense to qualify as CEE it must be an expense described in any of paragraphs (a) to (i) of the definition of that term. Generally, these paragraphs describe expenditures relating to the exploration or development of Canadian resource property, which includes rights to prospect, explore, drill and mine for minerals in a Canadian mineral resource.
SR&ED is defined in subsection 248(1) of the Act as systematic investigation or search that is carried out in a field of science or technology. Paragraph (d) includes in this definition, among others, work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing. However, the definition of SR&ED also specifically excludes several activities. In particular, paragraph (h) of the definition excludes work with respect to "prospecting, exploring or drilling for, or producing minerals, petroleum or natural gas."
Consequently, an expenditure which qualifies as CEE cannot be a qualified expenditure in respect of SR&ED by virtue of paragraph (h) of the definition. A resource corporation that incurs CEE and renounces the incurred CEE to holders of flow-through shares pursuant to subsections 66(12.6) or (12.66) of the Act is deemed not to have incurred the CEE expenses by virtue of paragraph 66(12.61)(b). However, such renounced CEE would still be expenditures incurred with respect to "prospecting, exploring or drilling for, or producing minerals, petroleum or natural gas" and excluded from SR&ED under paragraph (h) of the definition. In brief, regardless of the effects of the renunciation provided for in subsection 66(12.61) of the Act, an expense cannot qualify as both CEE and SR&ED.
Your deposit will be refunded under separate cover.
We trust that these comments will be of assistance.
Yours truly,
Fiona Harrison, CPA, CA
Manager
Resources Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs
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