8 December 2015 External T.I. 2015-0616321E5 F - CEE - Severance pay -- translation

Principal Issues: 1. Whether a severance payment to an employee who performed services on exploration projects would be part of the Canadian exploration expenses of a taxpayer.

2. Whether a severance payment to an employee who performed services on exploration projects would be part of the Canadian exploration and development overhead expenses of a taxpayer.

Position: 1. No. 2. No.

Reasons: 1. Severance payment is an expense made at the cessation of employment and does not represent consideration for services provided. A connection cannot be made between the expenditure and the exploration and development work performed.
2. Severance payment is not a Canadian exploration expense or a Canadian development expense and therefore, the conditions of the definition of Canadian exploration and development overhead expense are not met.

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2015-061632
Sylvie Labarre, CPA, CA

December 8, 2015

Dear Sir,

Subject: Canadian Exploration Expense

This is in response to your email dated November 3, 2015 in which you requested our view on the subject mentioned above.

Unless otherwise stated, all statutory references herein are references to the provisions of the Income Tax Act.

You wish to know if a severance payment paid to an employee, whose duties were focused exclusively on exploration activities, would qualify as Canadian exploration expenses ("CEE") as defined in subsection 66.1(6).

You also wish to know whether a severance payment made by the taxpayer to an employee who performed services on exploration projects (but whose duties were not all or substantially all directed towards exploration or development activities) would constitute Canadian exploration and development overhead expenses ("CEDOE"), as defined in subsection 1206(1) of the Income Tax Regulations, on the basis of being a compensation (and related benefits) expense.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular (IC)70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Salary costs for time devoted by an employee to functions which are all directed on exploration activities in Canada described in the CEE definition in subsection 66.1(6) would be included as CEE. However, the CRA position is that a severance payment is an expense made by the corporation at the time of cessation of employment and does not constitute an amount paid for services rendered. Consequently, it is not possible to establish a link between the expense and the exploration work carried out. Thus, such a severance payment would not be included in CEE.

Only part of the salary costs respecting time spent by an employee, whose duties are not all or substantially all all focused on exploration activities described in the definition of CEE in subsection 66.1(6), would be part of CEE - namely, for the part relating to time such exploration. activities. For the same reasons as indicated in the previous paragraph, no part of the severance payment would be part of CEE.

A severance payment in respect of an employee whose duties were focused on development activities similarly would not be included in Canadian development expense ("CDE").

The preamble to the definition of CEDOE in subsection 1206(1) of the Income Tax Regulations (“Regulations”) indicates that CEDOE means CEE or CDE (other than as excluded in the preamble). Thus, where an employee’s time is not devoted at least 90% to eligible exploration activities in Canada, the portion of the wages, salary or other remuneration or related benefits which is eligible as CEE or CDE forms part of CEDOE, as defined in subsection 1206(1) of the Regulation. Consequently, as a severance payment is not included in CEE or CDE, it would also not be included in CEDOE by reason inter alia of the preamble to such definition.

We trust that our comments will be of assistance.

Stéphane Charette, CPA, CMA, MBA
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and
Regulatory Affairs Branch