Ressources Eastmain Inc. v. Agence du revenu du Québec, 2021 QCCQ 4379

The taxpayer was a micro-cap junior exploration company devoted to two projects in northern Quebec. For the four taxation years in issue (2007 to 2010), it claimed between 49% and 71% of the remuneration of its president and CEO (“Robinson”) as Canadian exploration expense that was eligible for Quebec exploration credits. The correctness of this claim turned principally on whether under paragraph (b) of the definition of “Canadian exploration and development overhead expense” (contained in s. 360R2 of the Quebec regulations, and essentially the same as the corresponding federal definition in Reg. 1206(1)) his remuneration was not “in respect of a person employed by the taxpayer whose duties were not all or substantially all related to exploration or development activities.”

Fournier JCQ accepted (at paras. 250, 269) that Robinson devoted approximately 75% of his time to exploration activities, and only the balance of his time to such matters as investor relations and attending board meetings. After reviewing the jurisprudence on “all or substantially all,” he stated (at paras. 239-240, TaxInterpretations translation):

This review of the case law thus allows us to conclude that the expression "substantially all" does not lend itself to the use of a simple mathematical formula and should not be interpreted as corresponding to a given proportion of a whole established in an arbitrary manner.

On the contrary, the phrase is somewhat "elastic" and the meaning to be given to it must take into account the circumstances and context in which it is applied.

Accordingly, the claimed salary amounts qualified for the credits. The balance of his salary was not so eligible because it had not been claimed on a timely basis in the prescribed form.

In finding that the recurring costs of racks and boxes incurred by an exploration company in order to store core samples were capital expenditures, Fournier J stated (at paras. 295-297, TaxInterpretations translation):

The core boxes and racks allowed for the permanent preservation of a duplicate of each sample taken during exploration, in accordance with the best practices of the exploration industry. In this sense, the expenses incurred for the purchase of core boxes and racks added value to the samples taken on the exploration sites since they were the result of a scientific process. The conservation of duplicate samples allowed the results obtained during exploration to be validated at any time.

Moreover, even if the exploration on a site lasted only one year, the expenses incurred for the purchase of the boxes and core racks would still be of a capital nature given the durable nature of the property acquired.

Nor is this a situation like Johns-Manville where the property acquired annually was, as it were, "consumed" in the mining process. That is not the case here, since the purchase of the core boxes and racks gave a lasting effect to the exploration carried out on REI's various exploration sites, which ensured an increase in value.

However, in finding that the costs of constructing dirt berms at the exploration sites to contain the escape of harmful effluent were currently deductible, Fournier J stated (at paras 317):

[T]he floor mats or environmental berms deteriorate and are damaged by bears. They must therefore be replaced each year. Even the ARQ acknowledges that the life span of these mats may not be very long, forcing REI to acquire them on an annual basis.

In finding that the recurring costs of racks and boxes incurred by an exploration company in order to store core samples were capital expenditures, Fournier J stated (at para. 295, TaxInterpretations translation):

The core boxes and racks allowed for the permanent preservation of a duplicate of each sample taken during exploration … . The conservation of duplicate samples allowed the results obtained during exploration to be validated at any time.

As the expenditures were for the acquisition of depreciable property, they were not eligible for treatment as Canadian exploration expense under the Quebec equivalent of para. (k.1) of the definition.

In finding that the cost of having a recently-hired employee attend a course on geology at the University of Quebec qualified as Canadian exploration expense, Fournier J stated (at paras. 308-309, TaxInterpretations translation):

The evidence shows that the training course given to Thibaut Aubert was mandatory for any REI employee called to work in the wilderness on an exploration site. Again according to the evidence, the training expenses incurred by REI for its other employees who were called to work on one of its remote exploration sites would have been recognized as Eligible Expenses.

In the circumstances, the Court is of the opinion that the training taken by Thibaut Aubert was necessary for him to participate in the exploration activities on REI's sites and, in this sense, the expense incurred by REI in this regard was incurred to determine the existence of a mineral resource, to locate such a resource or to determine its extent or quality and must be included in the Eligible Expenses.