20 April 1995 External T.I. 9506865 - WHETHER CANADIAN DEVELOPMENT EXPENSE INCURRED

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

		950686
XXXXXXXXXX	Alan A. Cameron

Attention: XXXXXXXXXX

April 20, 1995

Dear Sirs:

Re: Investment in Canadian Mining

This is in reply to your letter of February 28, 1995 wherein you asked if certain costs would constitute "Canadian development expense" ("CDE") within the meaning assigned that phrase in subsection 66.2(5) of the Income Tax Act (the "Act"). As you are aware, your letter was forwarded to this Directorate for reply by Mr. Gilles Bergevin of Natural Resources Canada.

In particular, you asked three questions which were presented in your letter as follows:

Q1Australian company "Austco" purchases shares in a listed Canadian mining company "Canadaco" (but not 100% of the shares). I presume there is no CDE implications for "Austco"?

Q2Australian company "Austco" purchases 100% of the shares in the listed Canadian mining company "Canadaco" which becomes a subsidiary. "Austco" bid a 20% premium for the shares and paid say $400 million for "Canadaco", whose assets are an operating mine which cost and are valued at $150 million to develop and construct, and mining leases and exploration leases. "Austco" has paid $400M - $150M = $250M for the deposits and exploration leases. Can "Austco" deduct 30% of $250M = $75M from revenue generated by its newly purchased mine in its first year of ownership, and then 30% of $175M = $52M in year 2, etc?

Q3An Australian company wants to become involved in exploration and buys into an advanced exploration project. It pays $50 million for a 25% joint venture interest. It then contributes its share of further exploration and goes on to develop a mine. Will the $50 million be deductible as CDE? In year 1, can the Australian company deduct 30% x $50M = $15M from revenue to compute tax, in year 2 can it deduct 30% of $35M = $10.5M, etc?

Our Comments

Pursuant to paragraph (h) of the definition of CDE, "any consideration given by the taxpayer for any share or any interest therein or right thereto" is expressly excluded from CDE. Therefore, the cost to acquire the shares of "Canadaco" could not be included in CDE in either of the situations described in Q1 and Q2 above.

Under the Act a "joint venture" is not considered to be an entity separate from the participants therein. Therefore, with reference to Q3, to the extent that the amount paid to acquire the "25% joint venture interest" represented the cost to acquire a property referred to in paragraph (e) of the definition of CDE (essentially being a property described in paragraph (b), (e) or (f) of the definition "Canadian resource property" contained in subsection 66(15) of the Act or any right to or interest in such property) it would be eligible for inclusion in CDE. The amount that a taxpayer may deduct, in computing its income for a taxation year under the Act, with respect to its CDE is determined under subsection 66.2(2) thereof, however, generally speaking, amounts included in its CDE would be deductible at the rate of 30% of the declining balance thereof as you have suggested in your letter.

We have enclosed a copy of the definitions of CDE, "Canadian resource property" and "mineral resource" contained, respectively, in subsection 66.2(5), 66(15) and 248(1) of the Act for your information.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 21 of Information Circular 70-6R2, the above comments do not constitute an advance income tax ruling and accordingly are not binding on Revenue Canada.

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch