CRA rules on a non-resident parent issuing flow-through shares to renounce its CEE, and renounced CEE of its Canadian sub, re a mine restart project

A Canadian exploration company (the Company) wholly-owned by a non-resident company (Company B) whose shares are listed, determined that its mine that had produced, but never successfully, could be restarted if it were able to significantly expand the resource so as to potentially support a much higher throughput. It proposed to engage in scout and expansion drilling at surface, and in expansion and infill drilling underground, including related work such as the construction of underground infrastructure, in order to expand the resource. CRA ruled that the property was not a mine that had come into production in reasonable commercial quantities for the purposes of s. (f)(vi) of the definition of CEE in s. 66.1(6), and also gave a ruling regarding the qualification of the expenditures as CEE.

It was proposed that Company B would acquire an undivided interest in the Property from the Company for a cash purchase price equal to its fair market value. The proceeds of disposition would be included by the Company in element “F” of the definition of cumulative CDE, and Company B would include its expenditure as a CDE pursuant to para. (e) of that definition – with the Company distributing its sales proceeds as a PUC distribution to Company B.

The Company would then conduct exploration for its own account and as agent for Company B. The Company’s portion of the exploration expenditures would be financed by its issuing flow-through (common) shares (FTS) to Company B. To fund its exploration work, Company B would issue FTS to Canadian investors, and renounce to them both the CEE directly incurred by it and the CEE renounced to it by the Company. The reason for Company B issuing FTS is that its listed shares may be more attractive to the Canadian investors.

CRA ruled that:

• Provided that Company B is carrying on a business in Canada, s. 66(12.71) will not apply to prevent Company B from renouncing CEE as per the above.
• Provided Company B and the Company continue to be related at all relevant times, s. 66(12.67)(a) will not apply to prevent Company B from renouncing, to a Canadian investor, CEE that was deemed to be incurred by Company B as a result of the renunciation of CEE by the Company to Company B.

Neal Armstrong. Summaries of 2023 Ruling 2023-0961681R3 under s. 66.1(6) – CEE – (f) and s. 66(12.71).