Principal Issues: (1) Whether expenses relating to a proposed exploration program will qualify as Canadian exploration expenses under paragraph (f) of the definition of CEE and will not be considered to be related to a mine that has come into production in reasonable commercial quantities or to a potential or actual extension thereof; (2) Whether, if such expenses are incurred by a non-resident corporation carrying on business in Canada pursuant to a "farm-out agreement", such expenses could be renounced to flow-through shareholders; (3) Whether the farmer will have proceeds of disposition as a result of farming out Canadian resource properties; and (4) Whether GAAR would apply to recharacterize the tax consequences of the Proposed Transactions.
Position: (1) Yes, (2) Yes, (3) No, (4) No.
Reasons: (1) Based on the facts presented and written opinions provided by Natural Resources Canada, (2) By virtue of engaging in exploration activities in Canada, the non-resident corporation will be carrying on business in Canada. Therefore, subsection 66(12.71) will not preclude the non-resident from renouncing CEE to flow-through shareholders; (3) The Farm-in Agreements satisfy the administrative position in Interpretation Bulletin IT-125R4; (4) The proposed transactions are consistent with the administrative position relating to farm-out arrangements and there would therefore not be a misuse or abuse.