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. Whether the XXXXXXXXXX will be a mine in a mineral resource that exists on the Concession for the purposes of subparagraph (f)(vi) of the definition for "Canadian exploration expense" under subsection 66.1(6) of the Act? 2. Whether expenditures relating to a proposed new mine will qualify for inclusion for the purposes of paragraph (f) of the definition for "Canadian exploration expense" under subsection 66.1(6) the Income Tax Act?
Position: (1) No (2) Yes
Reasons: Based upon the written opinion from Natural Resources Canada.
XXXXXXXXXX
2014-053412
XXXXXXXXXX, 2015
Dear Sir:
Re:
Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-referenced taxpayer.
We understand that, to the best of your knowledge, none of the issues involved in the ruling request is:
(i) in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) before the courts; or
(v) the subject of a ruling previously considered by the Directorate involving the taxpayer or a related person.
DEFINITIONS
In this letter, the following terms have the meanings specified:
"Act" means the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) as amended to the date of this letter;
"Canadian development expense" has the meaning assigned to that term by subsection 66.2(5) of the Act;
"Canadian exploration and development overhead expense" has the meaning assigned to that term by paragraph 66(12.6)(b) of the Act and subsection 1206(1) of the Regulations;
"Canadian exploration expense" has the meaning assigned to that term by subsection 66.1(6) of the Act;
"Canadian resource property" has the meaning assigned to that term by subsection 66(15) of the Act;
"Concession" means XXXXXXXXXX;
"Corporation" means XXXXXXXXXX;
"Corporation Property" means the properties acquired by the Corporation on XXXXXXXXXX;
"CRA" means the Canada Revenue Agency;
"XXXXXXXXXX" means XXXXXXXXXX a corporation formed on XXXXXXXXXX, under the laws of the Province of XXXXXXXXXX;
"flow-through share" has the meaning assigned to that term by subsection 66(15) of the Act;
"XXXXXXXXXX" means the former producing mine that existed in the Concession and that has since been abandoned and is inactive;
"XXXXXXXXXX" means XXXXXXXXXX and it is not related to the Corporation;
"XXXXXXXXXX" means the ore body from which gold, copper, silver and zinc was produced by the XXXXXXXXXX;
"XXXXXXXXXX" means the mineral resource deposit located within the urban limits of XXXXXXXXXX;
"mineral resource" has the meaning assigned to that term by subsection 248(1) of the Act;
XXXXXXXXXX;
"NRCan" means Natural Resources Canada;
"principal-business corporation" has the meaning assigned to the term by subsection 66(15) of the Act;
"public corporation" has the meaning assigned to that term by subsection 89(1) of the Act;
"XXXXXXXXXX" means XXXXXXXXXX and that is not related to the Corporation;
"Regulations" means the Income Tax Regulations, C.R.C., c. 945, promulgated under the Act;
"taxable Canadian corporation" has the meaning assigned to that term by subsection 89(1) of the Act; and
"Technical Report" means the XXXXXXXXXX.
Our understanding of the statement of facts, proposed transactions and the purpose of the proposed transactions is as follows:
FACTS
1. The Corporation was formed as XXXXXXXXXX on XXXXXXXXXX under the Business Corporations Act (XXXXXXXXXX). XXXXXXXXXX completed an initial public offering on XXXXXXXXXX, when its shares commenced trading on the XXXXXXXXXX under the trading symbol "XXXXXXXXXX". XXXXXXXXXX.
2. The Corporation is XXXXXXXXXX. The taxation year of the Corporation ends on XXXXXXXXXX and its business number is XXXXXXXXXX. The head office is located at XXXXXXXXXX. The Corporation is serviced by the XXXXXXXXXX Taxation Centre and the XXXXXXXXXX Tax Services Office of the CRA. The Corporation is engaged in the business of mining exploration and evaluation of mineral resource properties.
3. XXXXXXXXXX.
The Corporation Property
4. On XXXXXXXXXX, the Corporation acquired from XXXXXXXXXX, an unrelated party, a XXXXXXXXXX% interest in the rights, titles and interests in properties spread over an area of XXXXXXXXXX.
5. The Corporation Property consists of XXXXXXXXXX.
The Mining Concession
6. One of the mining concessions in the Corporation Property is located in XXXXXXXXXX. The Corporation owns the mineral rights XXXXXXXXXX. XXXXXXXXXX owns XXXXXXXXXX% of the surface rights on the Concession and owns the mineral rights XXXXXXXXXX.
7. XXXXXXXXXX.
8. The XXXXXXXXXX was located on the Concession and it was the only workings capable of producing ore that has existed on the Concession. Outside the Concession, there were other producing mines that were owned and operated by unrelated parties. There were XXXXXXXXXX operating mines on properties adjacent to the Concession. XXXXXXXXXX.
9. In order to produce from the Concession in the future, the Corporation would need to develop a new mine by constructing its own workings to commence production from the Concession.
XXXXXXXXXX
10. XXXXXXXXXX.
11. XXXXXXXXXX.
12. XXXXXXXXXX.
Historical Ownership Of XXXXXXXXXX
13. Before acquisition by the Corporation, ownership of the XXXXXXXXXX dates back to XXXXXXXXXX to which the mining claim that included the XXXXXXXXXX was transferred in XXXXXXXXXX.
14. In summary, XXXXXXXXXX held the mining claim that contained the XXXXXXXXXX and is the current owner of the surface rights on the Concession.
15. At all relevant times, the Corporation is not related to, and deals at arm's length with, XXXXXXXXXX and all other corporations mentioned herein.
XXXXXXXXXX
16. XXXXXXXXXX.
17. The XXXXXXXXXX produced from an ore body known as the XXXXXXXXXX. XXXXXXXXXX.
18. The XXXXXXXXXX achieved production in commercial quantities from the XXXXXXXXXX. The XXXXXXXXXX did not achieve any significant commercial quantities of production from the XXXXXXXXXX.
19. XXXXXXXXXX.
20. When XXXXXXXXXX constructed the XXXXXXXXXX, it sank underground shafts and built underground working levels from which XXXXXXXXXX had also explored the XXXXXXXXXX although the XXXXXXXXXX was never mined in any significant commercial quantities. XXXXXXXXXX.
21. As the XXXXXXXXXX has been in operation for XXXXXXXXXX, it is being assumed that the XXXXXXXXXX had achieved production in reasonable commercial quantities at some point before it was closed in XXXXXXXXXX.
22. The XXXXXXXXXX has never been explored or mined since XXXXXXXXXX nor has it produced again.
23. The Corporation has data, records (including technical and operational reports), surveys, drill core and other information relating to the XXXXXXXXXX. It includes related information containing geological, exploration and mining information dating from XXXXXXXXXX.
24. Remediation of the XXXXXXXXXX was completed after the XXXXXXXXXX was closed. The illustration entitled XXXXXXXXXX demonstrate that there are no mining extraction facilities, such as a headframe or hoistroom, on the surface area. There are buildings and tanks, which all belong to XXXXXXXXXX.
25. When the XXXXXXXXXX closed in XXXXXXXXXX, the surface area was cleared of all man-made material. Surface facilities were dismantled and removed. The underground workings were flooded and permanent concrete caps were installed sealing all shafts to prevent inadvertent access.
26. In order for the Corporation to perform exploration work on the Concession, a permit and licence agreement with XXXXXXXXXX would be required to access the surface of the Concession. However, XXXXXXXXXX will grant such licence for no additional consideration.
27. When the Corporation Property was acquired by the Corporation in XXXXXXXXXX, the Corporation did not assume any reclamation liabilities with respect to the XXXXXXXXXX and is not responsible for any historical environmental liabilities associated with the XXXXXXXXXX site. The Corporation is not responsible for any environmental or reclamation liability on the Concession. This clarifies that the previous owners completed all of the required remediation and reclamation and the necessary environmental activities with respect to the site of the XXXXXXXXXX and that there are no such liabilities with respect to the Concession that a previous owner would wish the new owner to undertake.
28. The XXXXXXXXXX has lost the characteristics of a mine and has ceased to exist. There are no workings that are capable of producing ore from the Concession. There is much additional exploration and evaluation that would need to be performed in relation to the mineral resource in order to reach the stage where a decision could be made to proceed with commercial facilities for a producing mine.
PROPOSED TRANSACTIONS
29. The Corporation will undertake an exploration and mineral evaluation program (the "Exploration Program"). The XXXXXXXXXX of gold was not completely commercially mined out when XXXXXXXXXX ceased production in XXXXXXXXXX from the XXXXXXXXXX. The Corporation has confirmed that a gold resource remains that has the potential to be expanded by drilling known mineralization to depth and along strike, as well as by exploring for high-grade gold shoots that are known to exist, plunging below 500 metres in depth. The Corporation intends to aggressively pursue these plunging shoots in its XXXXXXXXXX exploration and evaluation program and XXXXXXXXXX.
30. The Corporation will conduct an evaluation of the mineral resource in the Concession in order to determine the extent and quality of the mineral resource. This would include evaluating metallurgy on historic core samples from the XXXXXXXXXX, gathering and reviewing the available historical data about the XXXXXXXXXX and the other mineral deposit zones in the Concession such as in the remnants of the XXXXXXXXXX in order to expand and upgrade the resource estimates on the Concession and the Inferred Resource estimate for the XXXXXXXXXX.
31. The Corporation intends to perform geological work, including compilation and review of data gathered to date to assess additional work that would need to be undertaken to further define the XXXXXXXXXX and mineralization of other ore deposit zones in the Concession. The Corporation recently completed the maiden compliant resource estimate for the XXXXXXXXXX. In order to further determine or to estimate further the extent and quality of the XXXXXXXXXX and other ore zones in the Concession, the Corporation will utilize the data from drill holes that were previously drilled by previous owners of the mine and from drill core assays.
32. The results at each stage will determine the next steps, including the appropriate drilling program to undertake on the Concession, such as confirmation drilling, a diamond drill program on surrounding areas of the XXXXXXXXXX, metallurgical testing on future drill holes and mineral resource estimation; and the design and execution of such programs.
PURPOSE OF THE PROPOSED TRANSACTIONS
33. The Proposed Transactions are being undertaken for the purpose of conducting an exploration and mineral resource evaluation program on the Concession in order to determine the existence, extent and quality of gold, silver and base metals on the Concession.
34. The Corporation is considering raising funds for the exploration and evaluation work on the Concession that are described in the Proposed Transactions by issuing flow-through shares. The Corporation closed a broker private placement of flow-through shares for gross proceeds of approximately $ XXXXXXXXXX on XXXXXXXXXX.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions and the Purpose of the Proposed Transactions and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:
A) The XXXXXXXXXX will not be a mine in a mineral resource that has come into production in reasonable commercial quantities for the purpose of subparagraph (f)(vi) of the definition "Canadian exploration expense" in subsection 66.1(6) of the Act.
B) Any expense incurred by the Corporation, in respect of the Exploration Program, which is incurred for the purpose of determining the existence, location, extent or quality of a mineral resource within the Concession, including any expense incurred in the course of:
(i) prospecting,
(ii) carrying out geological, geophysical or geochemical surveys,
(iii) drilling by rotary, diamond, percussion or other methods, or
(iv) trenching, digging test pits and preliminary sampling,
but not including
(v) any Canadian development expense, or
(v.1) any expense described in subparagraph (i), (iii) or (iv) in respect of the mineral resource, incurred before a new mine in the mineral resource comes into production in reasonable commercial quantities, that results in revenue or can reasonably be expected to result in revenue earned before the new mine comes into production in reasonable commercial quantities, except to the extent that the total of all such expenses exceeds the total of those revenues,
will qualify as Canadian exploration expense of the Corporation pursuant to paragraph (f) of the definition "Canadian exploration expense" in subsection 66.1(6) of the Act.
Except as expressly stated, these rulings do not imply acceptance, approval or confirmation of any income tax implications of the Facts or Proposed Transactions. In particular, this letter neither interprets nor confirms either expressly or implicitly:
(a) the reasonableness of any expenditure referred to in this letter;
(b) whether an expenditure not considered to be a Canadian exploration expense will qualify as a Canadian development expense;
(c) whether the Corporation is a principal-business corporation;
(d) whether any share of the capital stock issued by the Corporation will be a flow-through share; and
(e) whether an expenditure incurred by the Corporation is a prescribed Canadian exploration and development overhead expense.
The above advance income tax rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R6 Advance Income Tax Rulings and Technical Interpretations, dated August 29, 2014 and are binding on the CRA provided that the Corporation has commenced implementing the Proposed Transactions before XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act.
Yours truly,
XXXXXXXXXX
Manager
Resources Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
c.c. XXXXXXXXXX
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