8 February 2002 External T.I. 2001-0108605 - Canadian Exploration Expense

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Costs of employee salaries, consultants and travel and accommodation related to obtaining necessary permits and studies to bring a new mine into production can be included in the expenses referred to in paragraph 66.1(6)(g) of the Act.

Position:

Whether any expenditure qualifies for treatment as Canadian exploration expense ("CEE") is a question of fact to be determined from all of the relevant facts and circumstances.

Reasons:

Paragraph 66.1(6)(g) contains both a purpose test (i.e. incurred for the purpose of bringing a new mine in a mineral resource in Canada into production in reasonable commercial quantities) and a timing test (incurred before the coming into production of the new mine).

Not all expenses incurred prior to the commencement of production will qualify. Whether expenses will qualify as CEE under paragraph 66.1(6)(g) of the Act will depend upon the taxpayer's intention at the time the expenses were incurred and the nature of the particular expense incurred. Each expense would have to be reviewed to determine whether it was incurred for the purpose of bringing a new mine into production.

XXXXXXXXXX 								2001-010860
	Mohamud Jivraj
(613) 957-9796
February 8, 2002

Dear XXXXXXXXXX,

Re: Canadian Exploration Expense

This is in reply to your memorandum dated October 25, 2001 concerning the proper classification for income tax purposes of certain expenditures incurred by XXXXXXXXXX. You have asked for our comments on the interpretation of the definition of Canadian exploration expense (CEE) in paragraph 66.1(6)(g) of the Income Tax Act (the "Act") for the purpose of renunciation pursuant to subsection 66(12.6) of the Act. Specifically you ask whether costs of employee salaries, consultants and travel and accommodation related to obtaining necessary permits and studies to bring a new mine into production can be included in the expenses referred to in paragraph 66.1(6)(g) of the Act.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Service Office. However, we are prepared to provide the following general comments. All references are to the Income Tax Act.

Whether any expenditure qualifies for treatment as Canadian exploration expense ("CEE") is a question of fact to be determined from all of the relevant facts and circumstances. Paragraph 66.1(6)(g) contains both a purpose test (i.e. incurred for the purpose of bringing a new mine in a mineral resource in Canada into production in reasonable commercial quantities) and a timing test (incurred before the coming into production of the new mine).

Not all expenses incurred prior to the commencement of production will qualify. Whether expenses will qualify as CEE under paragraph 66.1(6)(g) of the Act will depend upon the taxpayer's intention at the time the expenses were incurred and the nature of the particular expense incurred. Each expense would have to be reviewed to determine whether it was incurred for the purpose of bringing a new mine into production. For example, expenses incurred to determine the impact that blasting would have on the environment could be for the purpose of bringing a new mine into production. Certain other expenses such as expenses incurred to determine which port should be used to ship production or how the property will be reclaimed when the minerals have been exhausted, would not be incurred for the purpose of bringing a mine into production as they relate to post production activities.

In addition, the CEE which may be renounced would be reduced under paragraph 66(12.6)(b) of the Act by any of those expenses that are prescribed Canadian exploration and development overhead expenses ("CEDOE"). Subsection 1206(4.2) of the Regulations defines the term "prescribed CEDOE". The definition of CEDOE is found in subsection 1206(1) of the Regulations.

The effect of paragraph 66(12.6)(b) of the Act is that expenditures which qualify for treatment as CEE but which fall within the ambit of the definition of CEDOE would not be eligible for flow-through share renunciation.

We hope our comments will be of assistance. If you have any questions concerning this matter, please contact the writer.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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