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: Whether the expenses to be incurred in respect of a proposed mineral resource exploration program would qualify as Canadian exploration expenses under paragraph (f) or (g) of its definition in subsection 66.1(6) of the Act? 66.1(6)
Position: No.
Reasons: The mine came into production in reasonable commercial quantities in XXXXXXXXXX , at which time the production rate reached well above 60% of the mill capacity and was maintained above that level for the next XXXXXXXXXX months. The mine closed in XXXXXXXXXX when the mine ran out of ore, and at that time the mine complex was put on care and maintenance. The mine was not abandoned with no hope of finding more ore. The mine did not lose its character as a mine. The existing surface facilities and buildings, such as the concentrator, the mining camp, the fresh air fan for underground ventilation, the compressors, the man dry, surface shop buildings and tailings pond will be used if mining resumes.
It is our view that the expenses which the taxpayer will be incurring with respect to the proposed exploration program would be considered to be related to a mine that has come into production in reasonable commercial quantities or to be related to a potential or actual extension thereof. As a result, these expenses would not qualify as Canadian exploration expenses under paragraph (f) or (g) of its definition in subsection 66.1(6) of the Act. NRCan visited the site on XXXXXXXXXX . A technical opinion of July 19, 2002 was subsequently received from NRCan confirming the above-noted views.
XXXXXXXXXX 2001-013315
David Shugar
(613) 957-2134
July 24, 2002
Dear XXXXXXXXXX:
Re: XXXXXXXXXX - Exploration Expenses
This is in reply to your letter of April 2, 2002, in which you requested a technical interpretation as to whether the expenses which XXXXXXXXXX will be incurring, with respect to the proposed XXXXXXXXXX program at the XXXXXXXXXX mine, will qualify as Canadian exploration expense ("CEE") under paragraph 66.1(6) of the Income Tax Act (the "Act").
All statutory references in this letter are to the Act.
Background
The XXXXXXXXXX property (the "Property") is located on the XXXXXXXXXX.
In XXXXXXXXXX acquired XXXXXXXXXX% of the shares of XXXXXXXXXX and became the owner of the Property. XXXXXXXXXX signed a mining and milling contract with XXXXXXXXXX for the excavation and processing of the Property's ore. Shortly after receiving the necessary mining permits, XXXXXXXXXX gave the go-ahead to the mining project. XXXXXXXXXX then proceeded to simplify the mill conveyor system to improve the efficiency of the ore transportation through the crushing and grinding circuit. The throughput capacity of the mill was improved to approximately XXXXXXXXXX tonnes per day. The mill break-in period extended from XXXXXXXXXX until XXXXXXXXXX, during which time the mill throughput was less than 20% of its capacity. In XXXXXXXXXX production reached more than 60% of the mill capacity and maintained that level until XXXXXXXXXX. From XXXXXXXXXX to XXXXXXXXXX, XXXXXXXXXX mined more than XXXXXXXXXX tonnes of ore XXXXXXXXXX. The ore was accessed by an adit and mined by drifting on the veins. Production stopped in XXXXXXXXXX when the mine ran out of ore. The mine site has been kept on care and maintenance since then. The portal had not been blocked to prevent entry to the mine and, in XXXXXXXXXX, two mine compressors for the pneumatic jumbos and pumps were still on site, along with the fresh air fan, to supply air to the underground working area.
Proposed Exploration
The proposed XXXXXXXXXX exploration and development program will target zones that will eventually be accessed by extending the existing underground workings, if enough ore is found and production is resumed. The ore will be accessed using the existing portal and by extending the existing underground workings as required, including the drift and the ventilation raise. The proposed XXXXXXXXXX mining program will use the same mining technique as before. The ore will be processed at the existing concentrator, and other existing surface facilities, such as the mining camp, will be re-utilized. The beneficiation plant is available to process any ore from the mine. The existing man dry, the maintenance shop, the tailings pond and the different buildings, will be an integral part of the operation.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the 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 Services Office. However, we are prepared to provide the following comments.
Paragraph (f) of the definition of CEE in subsection 66.1(6) includes expenses which have been incurred to determine the existence, location, extent, or quality of the ore. However, those expenses are precluded from being CEE if they can reasonably be considered to be related to a mine that has come into production in reasonable commercial quantities or to be related to a potential or actual extension thereof. Paragraph (g) of the definition of CEE in subsection 66.1(6) includes expenses which have been incurred for the purpose of bringing a new mine in a mineral resource into production in reasonable commercial quantities and incurred before the coming into production of the new mine.
Based upon the above-noted production history of the XXXXXXXXXX mine, it is our view that the mine came into production in reasonable commercial quantities in XXXXXXXXXX and maintained production at that level until XXXXXXXXXX, when the ore supply ran out. Since that time the mine has been on care and maintenance and has not lost its character as a mine. The mine was not abandoned with no hope of finding more ore.
In our view, the mine is not a new mine. It is a mine that came into production in reasonable commercial quantities in XXXXXXXXXX. The proposed XXXXXXXXXX exploration and mine development program will result, if successful, in the extension of the existing underground workings and the utilization of the existing surface facilities. The proposed XXXXXXXXXX exploration and development expenses would not qualify as CEE under paragraph (f) or (g) of the definition of CEE in subsection 66.1(6).
We trust our comments will be of assistance to you.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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