Section 66

Table of Contents

Subsection 66(4) - Foreign exploration and development expenses

Administrative Policy

November 1991 Memorandum (Tax Window, No. 12, p. 14, ¶1563)

Discussion of determination of numerical limit on the amount of the deduction.

88 CPTJ - Q.15

In light of Oceanspan, a U.S. citizen who has invested $1 million in U.S. oil and gas drilling expenses has not incurred any FEDE for purposes of any claims after he has moved to Canada.

Subsection 66(6)


Wardean Drilling Co. Ltd. v. M.N.R., 78 DTC 6202, [1978] CTC 270 (FCTD)

There was no requirement in s. 83A(8a) of the pre-1972 Act that the acquisition of property entail the acquisition of a business undertaking provided that the property was itself used in carrying on a business.

Where the two assets of a taxpayer used in its gas business comprised a 5% leasehold interest which was the sole source of its revenues, and an interest in 6 Crown leases in respect of which no exploration or development work had been done because it was considered uneconomic to do so, the sale of the 5% leasehold interest constituted the sale of all or substantially all of the property used by it in carrying on its gas business. Assets held by a sub-sidiary corporation were not used in the taxpayer's business.

Subsection 66(9)

Administrative Policy

93 C.P.T.J. - Q.26

Where a well, originally drilled in 1988, is re-entered in 1993 and drilling completed to a deeper zone resulting in the discovery of a new pool, 1988 drilling, completion, temporary access road and well site preparation costs, which originally qualified as CDE, will be eligible for reclassification under s. 66.1(9)(f) as CEE.

Subsection 66(10)


Sanderson, "Joint Exploration Corporations - An Overview", 1994 Canadian Petroleum Tax Journal, Vol. 7, No. 1, p. 53.

Subsection 66(10.1)

Administrative Policy

31 May 1994 T.I. 5-940585

Interest paid by a JEC on an interest-bearing loan received from a shareholder corporation in respect of which the JEC has elected under s. 21(2) will be deemed to be CEE that can be flowed-through by the JEC under s. 66(10.1).

93 C.P.T.J. - Q.35

Re effective date of a renouncement.

93 C.P.T.J. - Q.34

Re consequences of an excess renouncement.

93 C.P.T.J. - Q.30

A shareholder corporation need not be a shareholder of the JEC on the date renouncements were made, although it must have been a shareholder of the JEC throughout the period (ending before the end of the JEC's taxation year in respect of which the renouncements were made) during which the resource expenditures were incurred.

92 C.R. - Q.15

CEE that has been renounced to a shareholder corporation by a JEC cannot then be renounced by the shareholder corporation to a third party under the terms of a flow through share agreement.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 66 - Subsection 66(12.6) 33

September 1991 T.I. (Tax Window, No. 9, p. 1, ¶1461)

Where a corporation whose wholly-owned subsidiary previously has incurred CEE causes the subsidiary to renounce the CEE in its favour and it, in turn, renounces the CEE to new or existing shareholders who subscribed for additional share capital, the CEE which previously was incurred by the subsidiary cannot be treated as having been incurred by the corporation for purposes of either s. 66(10.1) or (12.6).

90 C.P.T.J. - Q.9

Because s. 66(10.1)(c) deems a shareholder corporation to have incurred expenses only for purposes of the CEE and cumulative CEE definitions, a subsequent renunciation by a shareholder corporation under either the JEC or flow-through share provisions of CEE renounced to it under s. 66(10.1)(c) is not technically available.

88 C.P.T.J. - Q.6

A JEC is entitled to renounce up to the full amount of its CEE irrespective of the fact that the JEC may have income in a particular year against which to deduct the CEE.

Subsection 66(10.2)

Administrative Policy

93 C.P.T.J - Q. 33

Where during the year while Corporation A is a shareholder, the JEC incurs $1 million of CDE and in December of that year, the JEC sells all its Canadian resource properties for proceeds exceeding the aggregate balance in its CCEE, CCDE and CCOGPE pools, it nonetheless may elect in the beginning of the following year to renounce the $1 million of CDE incurred in the initial year in favour of Corporation A, thereby resulting in an increase in its income under s. 59(3.2)(c).

Subsection 66(11.4) - Change of control

Administrative Policy

S3-F8-C1 - Principal-business Corporations in the Resource Industries

1.23 Subsection 66(11.4) is a deeming rule which applies if:

  • a taxpayer is subject to a loss restriction event as defined in subsection 251.2(2);
  • the taxpayer, a partnership of which the taxpayer is a majority-interest partner or, after September 12, 2013, a trust of which the taxpayer is a majority-interest beneficiary (as defined in subsection 251.1(3)), has acquired certain Canadian resource property or foreign resource property; and
  • the property was acquired within the 12-month period that ended immediately before the loss restriction event.

In such circumstances, subsection 66(11.4) deems the property to have been acquired at the time of the loss restriction event for the purpose of calculating the taxpayer's relevant resource pools other than for the purpose of applying section 66.7. However, this provision would not apply where the taxpayer was a PBC, or would have been a PBC if it were a corporation, immediately before the 12-month period preceding the loss restriction event.

Subsection 66(12.1) - Limitations of Canadian exploration and development expenses

Administrative Policy

93 C.R. - Q. 26, Q. 27

Discussion of RC position on widespread farm-outs, and on typical farm-outs in the mining industry.

12 June 1992 Memorandum (Tax Window, No. 21, p. 10, ¶2023)

General discussion.

92 CPTJ - Q.16

Detailed discussion of RC's policies on farmouts.

5 April 1991 T.I. (Tax Window, No. 3, p. 6, ¶1268)

Unde a widespread farm-out RC will consider the value of the non-contiguous property received by the farmee to be a reimbursement to the farmee for part of its CEE or CDE, with the result that the farmee's CEE or CDE pools will be reduced by that amount.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Proceeds of Disposition 64

90 C.P.T.J. - Q.2

RC will consider denying its farm-in treatment available under IT-125R3, para. 11 and applying ss.66(12.1)(a) and (b) where a farmee earns an interest in a non-producing property on which it incurred resource expenses, and simultaneously acquires the right to subsequently exchange all of the interest so earned for an interest in an unrelated producing property.

90 C.P.T.J. - Q.3

Consequences of a farmee incurring CEE to earn an interest in a farmor's non-producing resource property where the farmee also receives an interest in depreciable property previously acquired by the farmor.

88 C.P.T.J. - Q.11

ss.66(12.1)(a) or (b) will be applicable under a farm-in where there is production from the acreage in which an interest is being earned.

88 C.R. - Q.21

Where CEE is incurred by a partnership, that expense is also incurred by the partner to which it is allocated.

Subsection 66(12.5) - Unitized oil or gas field in Canada

Administrative Policy

92 C.P.T.J. - Q.1

Re treatment of amounts received by a taxpayer under a unitization agreement in excess of the amounts actually expended by it.

Subsection 66(12.6) - Canadian exploration expenses to flow-through shareholder

See Also

Hamilton v. The Queen, 97 DTC 787 (TCC)

The payment of licence fees of a resource company by the taxpayer on the basis that the corporation would issue flow-through shares to him to reimburse him for the expenditure did not give rise to a deduction to the taxpayer because the corporation did not satisfy the filing requirements of s. 66(12.68).

Administrative Policy

9 August 2012 T.I. 2012-0455341E5

Whee a subsidiary principal business corporation issues flow-through shares to its parent (also a principal business corporation) and uses the proceeds to incur qualifying CEE and CDE, the subsidiary may be entitled to renounce those expense to the parent under s. 66(12.6). The parent then would be entitled to renounce those expenses to its flow-thoough share investors, given that the prohibition in s. 66(12.6709A0 against renouncing previously renounced expenses does not apply to related corporations. However, by virtue of s. 66(12.66)(d), the subsidary cannot renounce CEE and CDE to the parent using the "look-back" rule in s. 66(12.66).

92 C.R. - Q.15

CEE that has been renounced to a shareholder corporation by a JEC cannot then be renounced by the shareholder corporation to a third party under the terms of a flow through share agreement.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 66 - Subsection 66(10.1) 33

14 September 89 T.I. (February 1990 Access Letter, ¶1108)

ss.16(12.6), (12.62) and (12.64), when they refer to "agreement" are reiterating the requirement in s. 66(15)(d.1) that the agreement be legally binding in order for expenses to "flow through" to a shareholder. The agreement, therefore, must be written.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date 155


Ronald Richler, "Creststreet Income Fund Uses Flow-Through Shares", Corporate Finance, Vol. XI, No. 4, 2004, p. 1124.

Subsection 66(12.7) - Filing re renunciation

Administrative Policy

87 C.R. - Q.29

Discussion of "effective date of renunciation" referred to on form T101.

87 C.R. - Q.31

The renounced expenses do not necessarily have to relate to the property identified on form T101.

Subsection 66(12.66) - Expenses in the first 60 days of year

Administrative Policy

28 January 1994 T.I. 7-940185

Because the definition of "flow-through share" requires that CEE must be incurred during the period commencing with the day of the agreement and ending at the end of the 24th month following the month of the agreement, if an expense is incurred after the 24-month period, the share will not be a "flow-through share". Accordingly, RC could not agree with an interpretation of s. 66(12.66) whereby an expense incurred within 60 days after the end of the 24th month would be eligible for renunciation.

90 C.P.T.J. - Q.13

Discussion of application of rule where a well is abandoned within 90 days after the end of the year.

88 C.R. - Q.23

Description of trust account procedure for meeting the requirement that the consideration be paid before the end of the year.

Subsection 66(12.69) - Filing re partners

Administrative Policy

87 C.R. - Q.30

Revenue Canada will not process an income tax return where form T101A or T102 supplementary does not have an identification number.

Subsection 66(12.71) - Restriction on renunciation

Administrative Policy

93 C.R. - Q. 24

The fact that the CEE deduction to which a principal business corporation would otherwise be entitled is limited for a particular year, under s. 66.1(2), to the amount of its income for that year will not by itself result in s. 66(12.71) applying.

Subsection 66(12.73) - Reductions in renunciations

See Also

Fagan v. The Queen, 2012 DTC 1139 [at 3217], 2011 TCC 523

The taxpayer entered into a flow-through share agreement with a corporation ("991") which he and his colleagues had incorporated for the purpose of investing in flow-through shares of an oil and gas company ("Sierra"). After the Minister reassessed the taxpayer to deny the deduction of amounts which 991 had renounced to the taxpayer and which Sierra, in turn, had renounced to 991, the taxpayer argued that the Minister could not reassess the taxpayer because 991 had not been reassessed (the taxpayer had provided a waiver under s. 152(4)(a)(ii) but 991 had not).

Angers J. rejected the taxpayer's argument that the phrase "except for the purposes of that renunciation" in ss. 66(12.61), (12,63) and (12.65) meant that flow-through expenses revert to the corporation once they are challenged by the Minister. He stated (at para. 85):

I would agree with the respondent's position that this phrase pertains to situations involving questions of whether the flow-through corporation has the status of principal business corporation or whether the taxpayer is truly a flow-through shareholder. If what the appellant suggests were actually the case, there would be no need for subsection 66(12.73) of the Act, which says that where a corporation renounces expenses in excess of the amounts it is entitled to renounce, that corporation must inform the Minister so that appropriate adjustments in the expense balances can be made.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4.01) 262

Administrative Policy

88 C.R. - Q.66

Re the circumstances and method by which RC will require adjustments.

Subsection 66(12.602) - Idem [Amalgamations and mergers]

Administrative Policy

9 January 2004 Memorandum

A principal business corporation would not be prohibited from renouncing $2 million of specified CDE in a particular year comprising $1 million of specified CDE incurred in that year and $1 million of specified CDE incurred in the following year, given that s. 66(12.66) does not deem the expenses incurred in the second year to be incurred on the last day of the preceding year for the purposes of s. 66(12.602)(c). Accordingly, the look-back CDE would be considered to be incurred in 2003 for purposes of the $1 million in s. 66(12.602)(c).

Subsection 66(14.5) - Penalty for late designation

Administrative Policy

89 C.P.T.J. - Q25

There is no provision for waiver of this penalty and an amended election will not be accepted unless accompanied by payment of the penalty.

Subsection 66(15) - Definitions

Canadian Resource Property


Markin v. The Queen, 96 DTC 6483 (FCTD)

The taxpayer's employer granted him and other employees a contractual right to receive an undivided 0.5% of net profits attributable to the interest of the employer in oil and gas properties. Gibson J. found that certain of the elements comprising the computation of net profits might reasonably be regarded as royalties where certain other elements entering into the calculation net profits were not in the nature of royalties. Given that no evidence was before the Court as to what were the actual contributing elements giving rise to the taxpayer's net profits interest on which a payment ultimately was made to him, Gibson J. would have been prepared to conclude that the grant of the net profits interest was in the nature of a royalty, had he not gone on to conclude that the amount ultimately received by the taxpayer was employment income to him.

Alberta and Southern Gas Co. Ltd. v. The Queen, 76 DTC 6362, [1976] CTC 639 (FCTD), aff'd 77 DTC 5244 [1977] CTC 388 (FCA), aff'd 78 DTC 6566, [1978] CTC 780, [1979] 1 S.C.R. 36

The taxpayer paid $4 million to Amoco in consideration of Amoco granting to the taxpayer the exclusive right to take petroleum from certain working interests, provided that this right would cease when the taxpayer received $4 million in cash or the equivalent in petroleum substances, plus interest. This arrangement was held to entail the purchase by the taxpayer of a Canadian resource property rather than a loan, given that "a paramount right to 'take' is predicated upon ownership", and that the taxpayer was required to look exclusively to the petroleum substances for its reimbursement without recourse to Amoco. The extraction of the petroleum by Amoco was done as agent for the taxpayer.

See Also

Alberta Energy Co. Ltd. v. The Queen, 95 DTC 220 (TCC), aff'd 98 DTC 6007 (FCA)

With respect to an "Acquisition Agreement" that the taxpayer entered into with the Alberta Crown, Bonner TCJ. found (at p. 224) that:

"As a consequence of the Acquisition Agreement, the appellant was singled out as the possessor of the exclusive right to call on the Minister to accord to it, in respect of any bitumen which it encountered, any rights which the Minister, in the exercise of the discretion vested in him by the Mines and Minerals Act, might decide to issue."

Accordingly, in the view of Bonner TCJ., the taxpayer disposed of "a right to a right" of the sort described in what then was s. 66(15)(c)(ii)(B) when under a "farmout agreement" with Esso Resources Canada Limited, the taxpayer received from Esso the sum of $4.5 million in consideration for "... the right, licence and privilege of earning an interest in oil sands rights ..." pursuant to the Acquisition Agreement. In any event, if the taxpayer had not disposed of a right, it at least had disposed of a "privilege". Accordingly, it had disposed of a Canadian resource property.

In the Court of Appeal, Létourneau J.A. stated that "contrary to what the [taxpayer] contended, what was given to it under the agreement was more than a mere expectancy of acquiring property and also more than a right to negotiate".

Administrative Policy

13 March 2013 Memorandum 2013-0480511I7 F - Canadian resource property

In order to obtain a licence to explore a mineral resource in Canada, a corporation reimbursed XX for its costs in performing an environmental assessment. Such costs were part of the cost of acquiring property described in (b)(ii) of the definition in s. 66(15) of a Canadian resource property, and were described in para. (e) of the definition of CDE in s. 66.2(5).

7 January 2013 T.I. 2012-0460791E5 - Qualified Farm Property & Oil Reserves

In response to a question "as to whether a taxpayer whose farm property meets the definition as a "qualified farm property"... within the meaning of subsection 110.6(1)...will be eligible to claim the capital gains deduction under subsection 110.6(2) on a subsequent disposition of the farm property in circumstances where petroleum or natural gas reserves are discovered on the property," CRA responded:

any real property the principal value of which depends on its petroleum, natural gas or related hydrocarbon content will constitute a "Canadian resource property"....For these purposes "principal" means more than 50%. Where the taxpayer owns one right that includes both the surface right and the subsurface right, and more than 50% of the value of the real property depends on the petroleum or natural gas reserves, the right would constitute a Canadian resource property and the disposition of the right would result in the tax consequences described in the previous paragraph [i.e., income inclusion under ss. 66.2(1) and 59(3.2)(c), if a negative CCDE balance arises]. Consequently... the proceeds received from the disposition of the right will not give rise to a capital gain such that the capital gains deduction under subsection 110.6(2) will not be available, as the amount determined under paragraph 110.6(2)(d) respect of that disposition would be nil.

2003 TEI Roundtable Q. 25, 2003-004860A

The determination whether a particular rental or royalty satisfies the requirement in para. (d) and (e) that 90% or more of the rental or royalty be payable out of or from the proceeds of the relevant production would not necessarily require that the proceeds of production from a particular well, accumulation or mineral resource be segregated.

Income Tax Technical News, No. 10, 11 July 1997: "Net Profits Interests and Proposed Section 18.1"

Discussion of the circumstances in which the inclusion of non-production sources of income in a net profits interest will cause it to not qualify as a Canadian resource property. It would accept that an NPI is CRP if

the conditions of the NPI provide that 90% or more of the total payments for each year under the NPI will relate directly to the amount or value of the NPI grantor's production during that year from [qualifying resource properties] from which the NPI was granted and, in addition, the remaining payments will be connected to the operation of the above resource property from which the NPI was granted.

21 August 1995 T.I. 5-951493

"'Real Property' generally refers to land and rights issuing out of, annexed to and exercisable within or about land ... . '[M]ineral resource content' refers to the mineral resource that is situated in or derived from the real property."

94 CPTJ - Q. 21 (941034)

Once it is determined that a particular net profits interest does not qualify as a Canadian resource property (in this context, because of a right to share in non-production sources of income, e.g., proceeds from the sale of depreciables), no portion of the net profits interest will qualify as a Canadian resource property.

88 CPTJ - Q.16

A net profits interest entitling the holder to share in the net proceeds of production and sale of oil or gas is a Canadian resource property by virtue of s. 66(15)(c)(iv).


Randy S. Morphy, Kim Maguire, "An Update on the Taxation of Farm-outs", Resource Sector Taxation, Vol. IX, No. 3, 2013, p. 661.

Farm-out coupled with transfer for consideration (p. 664)

CRA Document 2011-0420451E5(F) (November 22, 2011) is a recent external technical interpretation in which the CRA considered another situation involving a farm-out as part of a larger overall transaction. Specifically, the CRA was asked to comment on a situation where the owner of (presumably unproven) resource properties agreed to grant to a corporate purchaser an option to acquire an interest in the properties. In return, the purchaser agreed to make a cash payment to acquire the option and to perform exploration work on the properties and make further cash payments to preserve the option… .

Option should qualify as resource property (pp. 664-5)

The CRA provided comments [in 2011-0420451E5(F)] based on two alternative assumptions, the first being that the option qualifies as Canadian resource property (as defined in subsection 66(15)) and the second being that the option does not so qualify. this was a curious approach given that it ought to have been a simple exercise to conclude that the option qualified under both the current and proposed definitions of Canadian resource property at the time of the interpretation. The current definition included a "right to or interest in" either a working interest or a fee simple interest in a resource property; the proposed definition (now in force) included a "right to or interest in" a working interest and an "interest in" (but not a "right to") a fee simple interest. An option to acquire real property is both a "right to" that property under a plain reading of that term and an "interest in" that property as per the decision in Frobisher Limited v. Canadian Pipelines & Petroleum Limiter et al. [fn 11: (2959), 21 DLR (2d) 497 (S.C.C.) at 169-70, although we note that in the particular case, the Court found that the option was rendered void and of no effect because of a regulatory prohibition. The CRA seems to generally accept this proposition: see CRA Document 2012-048002117 (April 9, 2013).] If the resource property subject to the option qualifies as a Canadian resource property (and presumably it would), [fn 12: A mineral property would qualify under paragraph (b) (any right, licence or privilege to prospect, explore drill or mine for minerals) in the case of a working interest and under paragraph (g) (any real property the principal value of which depends on mineral resource content) in the case of a fee simple interest. Query whether a fee simple interest would also qualify under paragraph (b), given the rights of a fee simple owner would seem to include the rights described therein.] then the option should also qualify….

Randy S. Morphy, Richard Eisenhorn, "The Taxation of Royalties Excluded from the Resource Property Regime", Resource Sector Taxation, Vol. IX, No. 1, 2012, p.618

The amended version of para. (d) partly codifies the CRA's previous position (in Income Tax Technical News. No. 10), as to when a net profits interest will be a Canadian resource property (p. 621), and Canpar Holdings Ltd. v. Saskatchewan (Minister of Energy and Mines) "supports the view that the NPI holder does not need to have an 'interest in land'...." (p. 619)

Extensive discussion of the tax treatment of a royalty interest which does not qualify as a Canadian resource property.

Allgood, "Athabasca Oil Sands Trust: Tax Implications of Royalty Trust", Corporate Finance, Vol. V, No. 1, p. 348: Includes reference to a ruling that a net royalty in the production of synthetic crude oil was a Canadian resource property.

Fryers, "'Net Serve! One to Come!' (The Net Profits Interest in the Oil and Gas Industry - An In-Depth Analysis)", 1988 Canadian Petroleum Tax Journal, Spring 1988, p. 121: It is concluded that a net profits interest is a Canadian resource property by virtue of s. 66(15)(c)(iv).

Flow-Through Share


The Queen v. Jes Investments Ltd., 2007 DTC 5608, 2007 FCA 337

An exploration company ("Deena") that entered into an agreement styled as a flow-through share agreement with the taxpayer failed to incur any Canadian exploration and development expenses so that its purported renunciation of such expenses was invalid, and then went into receivership. In finding that the shares so issued by Deena were flow-through shares despite these failures, Ryer J.A. stated (at para. 6) "the relevant time to determine whether a share is a flow-through share is the time at which it is issued and the record shows that, at the time the Shares were issued, no breach of the Agreement had been committed by Deena."

Administrative Policy

5 September 2014 T.I. 2014-0534941E5 - Flow-through share ss 66(15) of the Income Tax Act

shares underlying flow-through warrant not required to be flow-through shares

Does a right to acquire a share of a principal-business corporation qualify as a flow-through share where the share to be acquired under the right will not qualify as a flow-through share? CRA stated:

[P]rovided that the right would otherwise qualify as a flow-through share, the right (other than a prescribed right) would continue to meet the conditions of a flow-through share when it is a right to acquire a share of the capital stock of a principal-business corporation that does not meet the definition of a flow-through share.

28 November 2010 CTF Annual Roundtable, 2010-0384341C6 - Flow-through Shares

flow-through unit

Respecting whether CEE can be renounced under a unit flow-through share agreement in respect of the portion of the subscription price allocated to a warrant to acquire a share that is not a flow-through share, CRA stated:

CEE can be renounced only in respect of the portion of the subscription price allocated to a warrant which represents a right to acquire a share that would be a flow-through share [as] pursuant to paragraph (b) of … "flow-through share," the amount of resource expenses that may be renounced under the agreement cannot exceed the amount of consideration received by the corporation for the flow-through share or the right to acquire the flow-through share….

6 September 1994 Memorandum 941986 and 942090 (C.T.O. "Are Special Warrants Flow-through Shares?)

Special warrants would qualify as flow-through shares due to the reference in the post-amble of the definition of rights to have a share issued.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 49 - Subsection 49(3) 49

6 December 1989 T.I. (May 1990 Access Letter, ¶1218)

Discussion of various issues respecting a public offering of flow-through shares.

Foreign Exploration and Development Expenses

Administrative Policy

90 C.P.T.J. - Q.36

There is no FEDE incurred by a taxpayer for the purposes of ss.66(15)(e) and 66(4) with respect to U.S. oil and gas drilling expenses incurred by him prior to becoming a resident of Canada.

Joint Exploration Corporation

Administrative Policy

23 June 1992 T.I. 921868 (January - February 1993 Access Letter, p. 20, ¶C56-211)

A principal business corporation that has, throughout its existence, always been a wholly-owned subsidiary of another corporation will qualify as a JEC irrespective of the number of corporations of which it has been such a subsidiary.

5 September 1991 T.I. (Tax Window, No. 9, p. 19, ¶1446)

A principal business corporation will not be disqualified as a JEC solely by virtue of having had, in the aggregate, more than ten shareholders since incorporation, provided that it did not have more than ten shareholders at any particular time.

Original Owner

Administrative Policy

94 C.P.T.J. - Q. 10

A person who has an interest in a partnership does not own a proportion or share of the partnership's property for purposes of s. 66.7, except where s. 66.7(10)(j) applies to deem the partner to have owned the Canadian resource property of the partnership. Thus, the partner will not be an "original owner".

Principal-Business Corporation


Wardean Drilling Co. Ltd. v. M.N.R., 78 DTC 6202, [1978] CTC 270 (FCTD)

It was indicated, obiter, that s. 83A(8a) of the pre-1972 Act, which referred to a principal business which was a gas business or a mining business, would not apply "where the 'principal business' at the relevant time was a combination of a 'gas business' and a 'mining business' and was neither a 'gas business' nor a 'mining business'."

Alberta and Southern Gas Co. Ltd. v. The Queen, 76 DTC 6362, [1976] CTC 639 (FCTD), aff'd 77 DTC 5244 [1977] CTC 388 (FCA), aff'd 78 DTC 6566, [1978] CTC 780, [1979] 1 S.C.R. 36

The activity of buying natural gas from approximately 100 producers of natural gas and selling that natural gas primarily (but not exclusively) to the taxpayer's American parent constituted "marketing". There was no necessity for the taxpayer to conduct an active campaign to search out purchasers.

M.W.A. Gas and Oil Ltd. v. MNR, 74 DTC 6123, [1974] CTC 140 (FCTD)

The taxpayer, which was incorporated in 1966 to do construction work on a turn-key Ford construction assembly plant, had completed its work by December 1967 with the exception of clean-up work, such as landscaping and the installation of external iron railings, and the negotiation of compensation for work done pursuant to change orders. In October 1968 expenses of $55,000 were incurred by the taxpayer in exploring and drilling for oil, and oil and gas exploration rights were acquired at a cost of $900,000.

The taxpayer's principal business for its fiscal year ended October 31, 1968 was its oil and gas business, notwithstanding that all its profit, and all its employees, for that year, related to its construction business. "In the plaintiff's 1968 taxation year its construction business was in its death throes while the oil and gas business was born and in its dynamic infancy reaching maturity in the succeeding year."

Sogemines Development Co. Ltd. v. MNR, 72 DTC 6254 (FCTD)

The principal business of the parent of the taxpayer was found not to be mining or exploring for minerals in light of the following facts: its objects were that of an investment business; of its total holdings of over $10 million only $247,000 represented its participation in mining exploration projects (with most of the balance being invested in shares of resource and industrial companies); it had no mining equipment, no office and no payroll; and it had recently described itself in a prospectus as an investment company. Heald J. noted (at p. 6259) that "the Shorter Oxford English Dictionary defined 'principal' as 'the chief, main or most important thing, part, point or element'".

MNR v. Consolidated Mogul Mines Ltd., 68 DTC 5284, [1968] CTC 429, [1969] S.C.R. 54

large share portfolio in companies with taxpayer-managed properties was held as part of mining business

In its 1957 to 1960 taxation years, the taxpayer carried on exploration work on properties in which it had a direct interest. However, its chief task was the development and management of properties owned by other companies in which it usually had a share interest. It generally subscribed for shares in a corporation owning prospects and by contract with the corporation controlled the expenditure of the invested money on exploration.

After noting that s. 83A(3) referred to a company whose "principal business is mining or exploring for minerals" without requiring "that such mining or exploring for minerals should be done within Canada or should be done upon properties in which the taxpayer seeking the deduction has an interest in the property" (p. 5286), Spence, J. went on to find that the taxpayer was engaged in mining and exploring for minerals and that this was its principal business. In response to a submission of the Minister referring to the large investment portfolio held by the taxpayer, he stated (p. 5286):

It may be said generally that although the source of the income of a corporation is an important element to be considered in determining which is its principal business it is not the only matter to be considered and not necessarily the determinant factor.

He quoted with approval the statement made in the Tax Appeal Board that:

[I]t would appear to be reasonable to assume that the multiplicity of arrangements which exist between mining companies and the constant juggling of shareholdings for various necessary purposes is just part and parcel of the mining business.

Words and Phrases
principal business

See Also

Ethyl Corp. of Canada Ltd. v. The Queen, 80 DTC 6194, [1980] CTC 198 (FCA)

"Petroleum products" are products that are derived from petroleum and accordingly do not include antiknock compound which contains foreign substances.

Words and Phrases
petroleum products

Administrative Policy

S3-F8-C1 - Principal-business Corporations in the Resource Industries

Meaning of petroleum products in s. 66(15)(a)

1.4 …[P]etroleum products…in paragraph (a) of the PBC definition, includes all steps up to the production and sale of a petroleum product as a raw material… . For example, the fabrication of toys from plastic is not a qualifying operation.

Meaning of drilling (s. 66(15)(a.1))

1.5 Paragraph (a.1)…[includes] all drilling operations even if such operations do not result in producing wells. For example:

  • drilling an oil or gas well, building a temporary access road to the well, or preparing the site in respect of the well;
  • drilling or converting a well for disposal of waste liquids from a petroleum or natural gas well;
  • drilling for water or gas for injection into a petroleum or natural gas formation; and
  • drilling or converting a well for the injection of water or gas to assist in the recovery of petroleum or natural gas from another well.

Meaning of mining or exploring (s. 66(15)(b))

1.6 Paragraph (b) of the PBC definition includes all activities necessary in the search for, and examination of, prospective minerals, the development of minerals for mining and the production of ore or minerals from the earth, such as:

  • prospecting;
  • carrying out geological, geophysical, or geochemical surveys;
  • drilling by rotary, diamond, percussion or other methods;
  • trenching, digging test pits, and preliminary sampling; and
  • clearing, removing overburden, and stripping.

Meaning of Fabrication of Metals (s. 66(15)(e))

1.7 Paragraph (e) of the PBC definition includes operations such as the manufacture of alloys (for example, brass, solder, and stainless steel) and the intermediate or final stages of manufacturing metals such as stamping, forming, machining, welding, cutting, or casting. …

Comparison of resource and non-resource activities

1.11 A…corporation will generally qualify as a PBC if the corporation's activities of the kind described in [s. 66(15)] represent a larger or more important business operation than all other activities of the corporation combined….

1.12 The following are important criteria for making [this] determination…:

  • the amount of income derived from each business operation;
  • the amount of gross revenue attributable to each business operation;
  • the operating costs and expenses of each business operation;
  • the capital employed in each business operation; and
  • the time and effort expended by the employees on each business operation.

Review of operations over more than a year

1.15 In… determining a corporation's principal business for a particular tax year, only the business operations in that year should be considered. However, in some cases it may be necessary to review the operations of the company over a longer period of time. For example, a mining corporation which has qualified as a PBC for many years might suffer a temporary decline in its mining activity in a particular year due to various problems, such as adverse economic conditions, labour problems, or other short-term difficulties. … [I]n determining whether a corporation qualifies as a PBC for a particular year, regard may be had to a future plan of the corporation to the extent that it is implemented in the year.

Assimilation of management functions

1.16 The management and administrative functions which are necessary to the conduct of the business operations referred to in [s. 66(15)] are considered to be an integral part of those operations.

Ownership not required

1.17 For a corporation to qualify as a PBC, it is not necessary that the corporation perform the qualifying activities described in [s. 66(15)] on its own property.

Participation in partnerships and JVs

1.18 A corporation might be a member of a partnership, joint venture, syndicate or similar association. In such cases, in determining whether the corporation qualifies as a PBC, the business operations carried on by such organizations are regarded as being carried on by the corporation directly, to the extent of the corporation's interest in such organizations.

Non-residents as PBCs

1.19 As the PBC definition only refers to a corporation, not a taxable Canadian corporation, a non-resident corporation can qualify as a PBC provided that it meets all applicable criteria.

11 July 1989 T.I. (Dec. 89 Access Letter, ¶1046)

A Canadian corporation whose only activity was mineral exploration for other corporations on a cost plus basis and which did not own any of the properties on which it worked was a principal - business corporation.

89 C.P.T.J. - Q10

A holding corporation will not be a principal-business corporation by virtue only of the activities of its grandchild subsidiary.

88 CPTJ - Q.8

RC continues to use the 90% rule as a general guideline for assessing.

86 C.R. - Q.6

Whether a corporation involved in resource activities and having investment assets is engaged in the business of investing those assets is a question of fact.


Administrative Policy

10 February 1999 T.I. 982685

Discussion of what is the "prime metal stage or its equivalent".

Paragraph 66(15)(i)

Administrative Policy

93 C.P.T.J. - Q.31

Where a shareholder invests $100 in shares of a JEC at the beginning of the year, during that year the JEC incurs $1,000 of CDE financed out of operating cash flows, and on December 31 the shareholder makes a payment to the JEC of $1,000 in respect of such CDE as additional share subscription proceeds, the JEC may renounce $1,000 of CDE to the shareholder in respect of that year on January 1 of the immediately following year. In other words, there is no requirement that the shareholder's payment to the JEC be traceable to specific expenses that the JEC subsequently renounces.

89 C.P.T.J. - Q.3

It is not a requirement that a shareholder's payment or loan to a JEC be traceable to specific expenses that the JEC subsequently renounces.