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:
1. Whether the proposed mine will be a new mine for purposes of the paragraph (g) of the CEE definition in 66.1(6).
2. Whether expenses will qualify for inclusion under paragraphs (f) and (g) of the definition of CEE.
Position: 1. Yes 2. Yes
Reasons:
1. Based upon the facts provided and the written opinion received from Natural Resources Canada, the mine will be a new mine for purposes of paragraph (g) of the definition of CEE.
2. Expenses that meet the definition of CEE would constitute CEE provided the conditions of the definition are met.
XXXXXXXXXX 2001-008113
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance income tax ruling request, XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above named corporation. We also acknowledge receipt of the documentation provided with your letter and with your initial income tax ruling request of XXXXXXXXXX.
To the best of your knowledge and that of the taxpayers 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 center 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 judgment has been issued, the time limit for appeal to a higher court has not expired; and
(v) is the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate.
Exhibits
The following documents were submitted in conjunction with the ruling request:
a) XXXXXXXXXX;
b) XXXXXXXXXX;
c) XXXXXXXXXX;
d) XXXXXXXXXX;
e) XXXXXXXXXX; and
f) XXXXXXXXXX.
Definitions
Unless otherwise stated, in this letter the following terms and expressions have the meanings specified below:
a) "A Co." means XXXXXXXXXX;
b) "Act" means the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended to the date of this letter;
c) "B Co." means XXXXXXXXXX;
d) "B Letter" mean the letter described in Exhibit d);
e) "Breakdown" means the letter described in Exhibit c) and the breakdown of exploration costs referred to in that letter. The Breakdown includes a detailed description of the proposed expenditures;
f) "Deposit" means the XXXXXXXXXX property, described in paragraph 3;
g) "Option Agreement" means the agreement referred to in Exhibit f);
h) "X Co." means XXXXXXXXXX;
i) "Y Report" means the XXXXXXXXXX report described in Exhibit a), and describes the anticipated exploration program, including the anticipated access to the zone, haulage ways, drainage, and ventilation. Further, it refers to the key elements of the project infrastructure, power, equipment to be used and details of the bulk sampling plans; and
j) "Z Report" means the XXXXXXXXXX report described in Exhibit b), and describes the physical characteristics of the Deposit mineralization and includes an estimate of the mineral resources.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Facts
1) X Co. is a corporation incorporated under the laws of XXXXXXXXXX It was continued under the laws of XXXXXXXXXX. X Co. is a "taxable Canadian corporation" and a "public corporation" within the meaning of subsection 89(1) of the Act.
2) X Co. is a junior Canadian exploration and development company. X Co.'s main properties are located in XXXXXXXXXX.
3) The Deposit consists of XXXXXXXXXX The lease and the mining claims are owned by A Co.
4) The Deposit was explored by A Co. in the XXXXXXXXXX.
5) On XXXXXXXXXX, X Co. entered into a binding agreement (Exhibit e)) to acquire an option to purchase the Deposit subject to the completion of its due diligence. On XXXXXXXXXX, X Co. entered into the Option Agreement, whereby A Co. granted to X Co. the irrevocable right during the period from XXXXXXXXXX, to enter upon, to conduct mining operations (as defined in the Option Agreement) in respect of, and to have quiet and exclusive possession of, the Deposit, and an irrevocable and exclusive option to become the owner of a XXXXXXXXXX% undivided interest in all or such part of the Deposit as X Co. may elect by providing written notice to A Co. During that period X Co. may remove from the Deposit reasonable amounts of materials for the purpose of sampling, testing, and assaying. X Co. can exercise its option during the option period by completing the following:
- Completing either a feasibility study or by bringing the Deposit into Commercial Production (as defined in the Option Agreement);
- Pay $XXXXXXXXXX to A Co. upon signing the Option Agreement to purchase the Deposit;
- Pay an advance royalty of $XXXXXXXXXX upon making a decision to put the Deposit into Commercial Production;
- Incur the minimum $XXXXXXXXXX in expenditures as required pursuant to the XXXXXXXXXX (as defined in the Option Agreement);
- Issue to A Co. XXXXXXXXXX X Co. shares, or XXXXXXXXXX shares plus a combination of shares and options to purchase XXXXXXXXXX shares;
- Issue to A Co. warrants on a total of XXXXXXXXXX shares; and
- spend at least $XXXXXXXXXX on exploration and development of the Deposit over XXXXXXXXXX years.
6) X Co. believes it can mine the Deposit economically, provided it can confirm the mineral resource, establish the mineability of the resource, and obtain an agreement with B Co. that B Co. will purchase and process the ore at B Co.'s facilities in XXXXXXXXXX. A tentative agreement in this regard has been reached and is the subject of the B Letter. The terms and conditions of the B Letter are conditional upon the milling of a bulk sample and the confirmation of the resource. XXXXXXXXXX.
7) To date, the only work that X Co. has done at the Deposit is that it has installed service buildings (ATCO trailers), a retention pond for water (to be pumped during ramp work), initial electricity installations, and has cleared the bedrock where the ramp will start.
Proposed transactions
8) X Co. intends to carry out an exploration program for the Deposit. None of the work on the Deposit will be conducted in connection with any other mineral claim currently owned by X Co. No facilities, workings or equipment from any other related mineral resource will be used for development and mining at the Deposit. No facilities, workings or equipment used to extract ore from the Deposit mine will be used for development and mining at any other mineral deposit.
9) In carrying out the exploration program, X Co. will incur Canadian exploration expenses as described in subsection 66.1(6) of the Act, including expenses for the purpose of determining the existence, location, extent or quality of the mineral resource in the Deposit, as well as expenses for the purpose of establishing the feasibility of bringing the Deposit into production in reasonable commercial quantities. Specifically, the stated objectives of the exploration program are to:
(a) Define the mineral resources between XXXXXXXXXX metres
The mineral resource is currently in the indicated category (XXXXXXXXXX%) and the inferred category (per the Z Report). There are no mineral resources in the reserve category, required to make a final production decision.
(b) Access the Deposit to obtain representative bulk samples for test work
Preliminary laboratory tests to date indicate that the Deposit ore is suitable for processing at B Co.'s mill in XXXXXXXXXX but B Co. will not make a final agreement to process the ore until it has treated a XXXXXXXXXX sample (per the B Letter), and installed a set of filters.
(c) Determine the competency of the ore to determine mining economics
There are questions on the mineability of the mineral resource primarily due to the previous experiences with poor ground conditions of A Co., while mining XXXXXXXXXX (per the Y Report).
(d) Confirm a threshold mineral resource for potential future mining
The commercial potential of the mineral resource is uncertain. The purpose of the development work, bulk sample testing and drilling is to confirm a threshold mineral resource for potential future mining, to assess the commercial suitability of the ore for B Co.'s operation and to establish appropriate mining methods.
10) The work includes XXXXXXXXXX.
11) At a later date, if commercial suitability is established, X Co. will purchase or lease mining machinery and equipment to be used in extracting the ore from the Deposit. The Deposit will be operated by X Co.
12) X Co. will issue flow-through shares within the meaning of subsection 66(15) of the Act to assist in financing the exploration and development activities referred to in paragraphs 9 and 10 above.
13) X Co. will renounce Canadian exploration expenses within the meaning of subsection 66.1(6) of the Act to the flow-through shareholders in accordance with the provisions of subsections 66(12.6) and 66(12.66) of the Act, to a maximum of $8 million.
14) X Co.'s management commissioned XXXXXXXXXX, geological and mining consultants, to prepare the Z Report. X Co. has reviewed the Z Report and found it is currently valid in all respects.
15) X Co.'s management commissioned XXXXXXXXXX to prepare the Y Report. X Co. has reviewed the Y Report and found it is currently valid in all respects.
16) X Co.'s Chief Engineer prepared the Breakdown. X Co. has reviewed the Breakdown and found it is currently valid in all respects.
Purpose of the proposed transactions
17) X Co. wishes to finance the proposed exploration program for the Deposit in part through the issuance of flow-through shares and intends to renounce Canadian exploration expenditures within the meaning of subsection 66.1(6) of the Act to the flow-through share investors.
Rulings requested and given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
We confirm that:
A) An expense incurred by X Co., after the date of this letter, and in respect of the exploration activities described in paragraphs 9 and 10 of this letter, which is incurred for the purpose of determining the existence, location, extent or quality of a mineral resource in the Deposit, will be a Canadian exploration expense of X Co. within the meaning of paragraph (f) of the definition thereof contained in subsection 66.1(6) of the Act, provided 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.
B) The Deposit will be considered to be a new mine in a mineral resource in Canada and any expense incurred by X Co., after the date of this letter, for the purpose of bringing the mine into production in reasonable commercial quantities and incurred before the coming into production of the mine will be a Canadian exploration expense of X Co. within the meaning of paragraph (g) of the definition thereof contained in subsection 66.1(6) of the Act, provided 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.
The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R4 issued by Revenue Canada on January 29, 2001 and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
The above ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.
Your truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2001
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2001
Email this Content