2000 Ruling 2000-0030163 - Underground Exploration Program - CEE

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.

Principal Issues: Whether expenses relating to an underground exploration program, to be carried out in three parts, will qualify for inclusion under paragraph (f) of the definition of CEE.

Position: Only expenses incurred in respect of Part B of the proposed underground exploration program may potentially so qualify.

Reasons: Based upon the facts of the situation and a written opinion received from Natural Resources Canada. A representative of that Department visited the site and concluded that expenses to be incurred in respect of Parts A and C of the proposed underground exploration program could reasonably be considered to relate to a potential extension of a mine that has come into production in reasonable commercial quantities. However, such conclusion was not reached with regard to expenses to be incurred in respect of Part B of the exploration program.

As such, expenses relating to Parts A and C of the exploration program would be precluded from qualifying under paragraph (f) to the definition of CEE due to the provisions of subparagraph (f)(vi) thereto. However, expenses relating to Part B of the exploration program would not be so precluded with the opinion from Natural Resources Canada supporting the view that expenses relating to Part B of the exploration program should, if otherwise qualifying, constitute CEE.

XXXXXXXXXX 							2000-003016

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above corporation. We also acknowledge receipt of the information provided by facsimile on XXXXXXXXXX, as well as our various telephone conversations concerning this matter.

The above corporation files its income tax returns under business number XXXXXXXXXX and its head office is located at XXXXXXXXXX. It is serviced by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.

To the best of your knowledge and that of the taxpayer involved, none of the issues contained herein:

i) is in an earlier tax return of the taxpayer or a related person;

ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

iii) is under objection by the taxpayer or a related person;

iv) is before the Courts or, if a judgement has been issued, the time limit for appeal to a higher Court has not expired; or

v) is the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate.

Definitions

Unless otherwise stated, in this letter the following terms and expressions have the meanings specified below:

"Act" means the Income Tax Act R.S.C. 1985 (5th Supp.), c.1 as amended to the date of this letter.

"Canadian development expense" has the meaning assigned to that expression by subsection 66.2(5) of the Act.

"Canadian exploration expense" has the meaning assigned to that expression by subsection 66.1(6) of the Act.

"Canadian resource property" has the meaning assigned to that expression by subsection 66(15) of the Act.

"depreciable property" has the meaning assigned to that term by subsection 13(21) of the Act.

"flow-through share" has the meaning assigned to that expression by subsection 66(15) of the Act.

"mineral resource" has the meaning assigned to that term by subsection 248(1) of the Act.

"principal-business corporation" has the meaning assigned to that term by subsection 66(15) of the Act.

"public corporation" has the meaning assigned to that term by subsection 89(1) of the Act.

"taxable Canadian corporation" has the meaning assigned to that expression by subsection 89(1) of the Act.

"X Co." means XXXXXXXXXX.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1. X Co. was formed under the laws of the Province of XXXXXXXXXX and continues to subsist thereunder.

X Co. is a public corporation and a taxable Canadian corporation for purposes of the Act. The fiscal period of X Co. ends on XXXXXXXXXX.

2. The authorized share capital of X Co. consists of an unlimited number of common shares. In its most recent quarterly financial statements, being as at XXXXXXXXXX, X Co.'s issued share capital consisted of XXXXXXXXXX common shares.

The common shares of X Co. are listed on the XXXXXXXXXX.

3. XXXXXXXXXX.

X Co. is a principal-business corporation for purposes of the Act.

4. The principal asset of X Co. is XXXXXXXXXX.

XXXXXXXXXX.

5. XXXXXXXXXX.

6. XXXXXXXXXX.

7. XXXXXXXXXX.

Proposed Transactions

8. X will conduct an underground exploration program from the XXXXXXXXXX which will, in part, involve exploration at depth of the XXXXXXXXXX properties. In particular, this program will consist of three parts with the underground infrastructure at the XXXXXXXXXX being utilized as the point of access for each part of this exploration program. The XXXXXXXXXX will be utilized since, given the depth of the proposed exploration work, it would be uneconomic to sink a new exploration shaft and not technically feasible to do drilling from the surface.

9. The underground exploration program referred to in the preceding paragraph will consist of three parts as follows:

a) XXXXXXXXXX.

b) XXXXXXXXXX.

c) XXXXXXXXXX.

Additional Information

10. X Co. wishes to raise the financing necessary (estimated to be between $XXXXXXXXXX) to fund the proposed underground exploration program described in paragraph 8 above, from the public through an issuance of shares each of which is intended to qualify as a flow-through share for purposes of the Act. It is anticipated that the above proposed underground exploration program will be conducted in the years XXXXXXXXXX.

Purpose of the Proposed Transactions

11. Part A and Part C of the underground exploration program described in paragraphs 8 and 9 above are being undertaken with the objective of increasing the XXXXXXXXXX reserve and resource position with regard to the XXXXXXXXXX property. Part B of that underground exploration program is being undertaken with the objective of establishing the XXXXXXXXXX reserve and resource position with regard to the XXXXXXXXXX properties.

Ruling Given

Provided that the above statements of facts, proposed transactions and purpose of the proposed transactions are accurate and constitute complete disclosure thereof, and that the proposed transactions are carried out as set forth herein, the following ruling is given:

A. An expense incurred by X Co., after the date of this letter and in respect of Part B of the underground exploration program detailed in paragraphs 8 and 9 above, which is incurred for the purpose of determining the existence, location, extent or quality of a mineral resource, will qualify as Canadian exploration expense of X Co. pursuant to paragraph (f) to the definition thereof contained in subsection 66.1(6) of the Act, notwithstanding subparagraph (v) or (vi) of that definition, provided:

i) the expense does not constitute the cost, or any part of the cost, to X Co. of any depreciable property or any Canadian resource property;

ii) the expense is incurred before a mine comes into production in respect of any mineralization that may be found pursuant to Part B of the underground exploration program referred to above; and

iii) Part B of the underground exploration program referred to above does not culminate in an extension of a mine that has come into production in reasonable commercial quantities.

The above ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

This ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments thereto.

Comments

I. Except as expressly stated, our ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly:

i) the determination of the fair market value or adjusted cost base of any property referred to herein;

ii) whether any particular expense incurred by X Co. in respect of Part B of the underground exploration program detailed in paragraphs 8 and 9 above, will qualify as Canadian exploration expense of X Co.;

iii) whether any share in the capital stock of X Co. which is issued as envisioned in paragraph 10 above will be a flow-through share; or

iv) whether, if economic mineralization is found pursuant to Part B of the underground exploration program detailed in paragraphs 8 and 9 above, such mineralization will be exploited by way of a mine qualifying as a new mine for purposes of the Act.

II. In our view, expenses incurred by X Co. in respect of Part A and Part C of the underground exploration program detailed in paragraphs 8 and 9 above, will not be able to qualify as Canadian exploration expense of X Co. under paragraph (f) to the definition thereof contained in subsection 66.1(6) of the Act, since those expenses may reasonably be considered to relate to a potential extension of the XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch