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 expenses relating to certain exploration programs will qualify for inclusion under paragraph (f) to the definition of CEE. Whether a mine which may be established would be a "new mine" for purposes of paragraph (g) to the definition of CEE.
Position: Expenses incurred in respect of the proposed exploration programs may potentially qualify under paragraph (f) to the definition of CEE. A mine established utilizing a new shaft in accordance with the mine plan described herein would be a "new mine" for purposes of paragraph (g) to the definition of CEE.
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 reached conclusions that supported the above positions.
XXXXXXXXXX 2002-016729
XXXXXXXXXX, 2002
Dear XXXXXXXXXX:
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 your representations submitted by facsimile on XXXXXXXXXX, and the additional information provided with your letter of 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.
"adjusted cost base" has the meaning assigned to that expression by section 54 of the Act.
"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.
"Property" means the XXXXXXXXXX property owned by X Co., which is comprised of XXXXXXXXXX contiguous mineral claims and XXXXXXXXXX mining leases, XXXXXXXXXX, extending across XXXXXXXXXX in XXXXXXXXXX.
"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.
"Y Co." means XXXXXXXXXX.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. X Co. is a corporation that exists under the XXXXXXXXXX Company Act.
X Co. is a public corporation and a taxable Canadian corporation for purposes of the Act. The fiscal periods of X Co. end on XXXXXXXXXX.
2. The authorized share capital of X Co. consists of XXXXXXXXXX shares and XXXXXXXXXX shares. At XXXXXXXXXX, X Co.'s issued share capital consisted of XXXXXXXXXX shares.
The XXXXXXXXXX shares of X Co. are listed on the XXXXXXXXXX under the ticker symbol: XXXXXXXXXX. These shares are widely held by members of the public with no party owning shares with voting rights, or able to exercise such rights, which would represent control of X Co. for purposes of the Act.
3. The business operations of X Co. involve the exploration for XXXXXXXXXX, the development of XXXXXXXXXX projects and the mining of XXXXXXXXXX. It's mining operations are principally located in XXXXXXXXXX.
X Co. is a principal-business corporation for purposes of the Act.
4. X Co. acquired XXXXXXXXXX% interest in the Property, which includes a XXXXXXXXXX mill and related surface and underground infrastructures, in XXXXXXXXXX.
From XXXXXXXXXX to XXXXXXXXXX, X Co. negotiated the acquisition and financing of the Property from Y Co. X Co. acquired the Property from Y Co. in XXXXXXXXXX for consideration comprised of $XXXXXXXXXX.
The Property is approximately XXXXXXXXXX long XXXXXXXXXX and averages about XXXXXXXXXX in width, covering a surface area of almost XXXXXXXXXX. The Property is located approximately XXXXXXXXXX.
XXXXXXXXXX
5. Previous production at the Property began at an underground mine referred to as the "XXXXXXXXXX Mine" in XXXXXXXXXX and at another underground mine referred to as the "XXXXXXXXXX Mine" in XXXXXXXXXX. A distance of approximately XXXXXXXXXX separates the two mines.
Mining operations were performed from ramps accessing the upper part of the deposits at the XXXXXXXXXX and XXXXXXXXXX Mines. The XXXXXXXXXX mill facility, referred to in paragraph 4 above, was built at the XXXXXXXXXX Mine to process ore from the two mines. A total of XXXXXXXXXX tonnes, at an average XXXXXXXXXX grade of XXXXXXXXXX grams per tonne, were extracted between XXXXXXXXXX and XXXXXXXXXX to produce XXXXXXXXXX.
The XXXXXXXXXX Mine closed in XXXXXXXXXX and the XXXXXXXXXX Mine closed in XXXXXXXXXX. The mill at the XXXXXXXXXX Mine has been kept on care and maintenance since it was shut down XXXXXXXXXX.
6. Just prior to the XXXXXXXXXX Mine closing in XXXXXXXXXX, an area referred to as XXXXXXXXXX, situated XXXXXXXXXX of the XXXXXXXXXX Mine, was being developed for production. However, a mining operation was never developed at the XXXXXXXXXX Zone.
From XXXXXXXXXX to XXXXXXXXXX, the former owners of the Property constructed a XXXXXXXXXX haulage drift at the XXXXXXXXXX to access the XXXXXXXXXX Zone, situated between the XXXXXXXXXX and XXXXXXXXXX Mines, and connect the XXXXXXXXXX Mine to a XXXXXXXXXX shaft close to the XXXXXXXXXX Mine which was constructed XXXXXXXXXX.
Rail for the haulage way was never completed prior to closure of both mines in XXXXXXXXXX and ore was never hoisted to surface using the XXXXXXXXXX Mine shaft. The haulage way was used to access the XXXXXXXXXX Zone for definition drilling and stope development, however only XXXXXXXXXX tonnes of ore were extracted from the XXXXXXXXXX Zone prior to the mine closure.
7. Immediately after acquiring the property in XXXXXXXXXX, X Co. commenced an initial diamond drill program with the objective of increasing the XXXXXXXXXX mineral inventory in the XXXXXXXXXX Mine area from XXXXXXXXXX to XXXXXXXXXX.
The program, which was completed in XXXXXXXXXX, totalled XXXXXXXXXX drill holes, or XXXXXXXXXX metres, and was successful in discovering an additional XXXXXXXXXX contained in two new ore zones XXXXXXXXXX situated to the east of and at depth from the previously identified zones in the XXXXXXXXXX Mine area. In this letter, the adjacent zones XXXXXXXXXX will be referred to as "Zone XXXXXXXXXX".
8. A feasibility study on the Property was completed in XXXXXXXXXX. In particular, X Co., with the assistance of several independent consultants, completed an economic evaluation of the measured and indicated resources in the XXXXXXXXXX Mine area. This evaluation established proven and probable reserves of XXXXXXXXXX tonnes at an average grade of XXXXXXXXXX per tonne XXXXXXXXXX.
9. The feasibility study contemplates a mine development and operating plan for Zone XXXXXXXXXX and the XXXXXXXXXX Mine area, which may be summarized briefly as follows:
(a) A new XXXXXXXXXX shaft will be sunk from the surface (proposed on XXXXXXXXXX) next to the XXXXXXXXXX zone. A circular ramp will be constructed around the production shaft to allow the movement of mine equipment between different levels of the mine.
(b) The XXXXXXXXXX Mine ramp will be extended from the XXXXXXXXXX to the XXXXXXXXXX.
(c) A haulage drift will be excavated from the XXXXXXXXXX Mine ramp at the XXXXXXXXXX east to the proposed production shaft.
(d) The new shaft will provide underground access for the miners and services with all of the ore and waste from the XXXXXXXXXX Mine area and Zone XXXXXXXXXX being extracted from the new shaft.
(e) Once the ore has been skipped to surface using the new shaft, ten wheel transport trucks will carry the ore XXXXXXXXXX to the existing XXXXXXXXXX tonne per day mill. Minor modifications to the mill are expected to increase the capacity to XXXXXXXXXX tonnes per day.
(f) Pre-production development costs of $XXXXXXXXXX are required to commence mining operations at the XXXXXXXXXX Mine area and Zone XXXXXXXXXX. The projected capital costs may be summarized as follows:
XXXXXXXXXX
? Surface infrastructures XXXXXXXXXX
? Underground infrastructures XXXXXXXXXX
? Definition drilling XXXXXXXXXX
? Mobile equipment XXXXXXXXXX
? Mill XXXXXXXXXX
? Paste backfill plant XXXXXXXXXX
? Inventory XXXXXXXXXX
? Preparation and administration XXXXXXXXXX
Total XXXXXXXXXX
(g) Although a large fleet of machinery and diesel equipment was acquired as part of the purchase of the Property, it is expected that the diesel equipment will be replaced by new electrical equipment. The feasibility study recommends that new electrical mine equipment (scoop trams) be acquired to mine Zone XXXXXXXXXX which will reduce the additional ventilation costs associated with diesel equipment.
10. Mineral reserves at the XXXXXXXXXX Mine area and Zone XXXXXXXXXX total XXXXXXXXXX, of which, XXXXXXXXXX relates to Zone XXXXXXXXXX. Based on current reserves, the proposed mining operations at the XXXXXXXXXX Mine area and Zone XXXXXXXXXX would have an economic life of XXXXXXXXXX .
The mineral reserves of Zone XXXXXXXXXX are a distinct and separate zone from the ore mined and contained in the mineral reserves of the XXXXXXXXXX Mine area. As noted in paragraph 7 above, X Co. discovered Zone XXXXXXXXXX from a surface exploration program following the closure of the XXXXXXXXXX and XXXXXXXXXX Mines by Y Co.
Zone XXXXXXXXXX is not connected by underground access to the XXXXXXXXXX Mine area. The deepest underground access in the West Mine is a ramp that ends XXXXXXXXXX metres below surface, approximately XXXXXXXXXX metres from the western limit of Zone XXXXXXXXXX. The top of Zone XXXXXXXXXX starts at approximately XXXXXXXXXX metres and extends down to the XXXXXXXXXX metre level.
The mining operations at Zone XXXXXXXXXX would be dependent almost exclusively on new infrastructure and equipment below the surface
Proposed Transactions
11. X Co. will complete the XXXXXXXXXX surface exploration program presently underway to explore the eastern and dip extensions of Zone XXXXXXXXXX. This is a two phase diamond drilling program of approximately XXXXXXXXXX metres to test the depth extension of the XXXXXXXXXX zone and the eastern extension of the XXXXXXXXXX zone. The objective of the exploration program is to ultimately increase the mineral reserves to a level sufficient to extend the current projected mine life of XXXXXXXXXX.
12. An additional exploration program, which may include both surface and underground work, will be undertaken to increase the confidence level in the grade, geometry and continuity of the probable reserves in Zone XXXXXXXXXX.
13. Following completion of the exploration programs referred to in paragraphs 11 and 12 above, assuming a positive development decision, during the XXXXXXXXXX year pre-production period leading to commercial production at Zone XXXXXXXXXX and the XXXXXXXXXX Mine area, X Co. will incur infrastructure and capital asset costs of $XXXXXXXXXX as described in paragraph 9 above.
14. In particular, if it is decided to develop a mining operation at Zone XXXXXXXXXX, it would utilize a new shaft sunk from the surface as described in part (a) to paragraph 9 above. X Co. would sink this new shaft some XXXXXXXXXX metres east of the former XXXXXXXXXX Mine portal (this shaft is referred to as the "XXXXXXXXXX shaft" in documents relating to this potential development and will be referred to as the "Zone XXXXXXXXXX Shaft" in this letter).
A mining operation developed at Zone XXXXXXXXXX would not depend on the former XXXXXXXXXX Mine or XXXXXXXXXX Mine workings to operate. All underground personnel would gain access to their working faces using the Zone XXXXXXXXXX Shaft. The ore and waste would exclusively be hoisted through the Zone XXXXXXXXXX Shaft once it is operational. In addition, mine water would be pumped up the Zone XXXXXXXXXX Shaft and it would be used as the exhaust for the ventilation system of the mine.
While some connections would exist between the former XXXXXXXXXX Mine and the workings of the Zone XXXXXXXXXX Shaft, such connections would not create dependency for production purposes based upon the current mine plan for Zone XXXXXXXXXX. The three underground connections which would provide access from the former XXXXXXXXXX Mine workings to the Zone XXXXXXXXXX Shaft workings are: the existing track drift on the XXXXXXXXXX metre level; the future haulage drift on the XXXXXXXXXX metre level; and a ventilation raise that would supply fresh air at the Zone XXXXXXXXXX Shaft workings.
The XXXXXXXXXX metre level track drift connects the XXXXXXXXXX and XXXXXXXXXX Mines and was developed to provide drilling platforms and haulage capacity to bring ore to the XXXXXXXXXX Mine. However, this drift was never used to transport ore or any other material. In the current mine plan, this drift will not be used for ore transportation but rather will be used as a conduit to bring in fresh air ventilation to the XXXXXXXXXX and XXXXXXXXXX ore zones.
The new XXXXXXXXXX metre level haulage drift would be equipped with a new trolley and cars and would be used to transport the ore from an ore zone extension, referred to as the "XXXXXXXXXX", discovered by Y Co.
The existing surface ventilation raise above the XXXXXXXXXX metre level to the surface would supply ventilation to the new workings along with the main fans located underground. However, more than XXXXXXXXXX metres of additional raises would have to be developed for the new mining area. The ventilation raise would also be used as an egress escape way.
The centre of the XXXXXXXXXX and XXXXXXXXXX ore zones which would be mined using the Zone XXXXXXXXXX Shaft is some XXXXXXXXXX metres below the bottom of the ramp system that was formerly utilized to transport ore to the surface at the XXXXXXXXXX Mine. As such, that system is economically unusable for purposes of removing ore from those new areas. The former XXXXXXXXXX Mine ramp would be extended to the XXXXXXXXXX metre level to permit the mining equipment to be brought under ground without having to dismantle same and lower it through the Zone XXXXXXXXXX Shaft. Once the equipment is in the new mining area, it would remain there. The service and repair of same would be done underground at a new under ground garage located at the XXXXXXXXXX metre level, close to the Zone XXXXXXXXXX Shaft.
On the surface, a new dry would be constructed, connected to the shaft house via a covered corridor, which would accommodate all the underground personnel. X Co. has purchased a hoist, however, the head frame would remain to be fabricated to the specification of any mining operation established.
X Co. would have to start a mining operation developed at Zone XXXXXXXXXX using newly hired personnel. After the XXXXXXXXXX and XXXXXXXXXX Mines were closed XXXXXXXXXX, only a few key staff members were kept and hired by X Co. XXXXXXXXXX. The miners would be hired from the surrounding region.
15. XXXXXXXXXX.
It is not known at this time how ore will be extracted from the XXXXXXXXXX Zone. However, the mining of the XXXXXXXXXX Zone will likely utilize the existing haulage drift and the proposed Zone XXXXXXXXXX Shaft.
16. The underground infrastructure acquired by X Co. that was used in mining the deposits at the XXXXXXXXXX Mine (i.e., ramps and related underground infrastructure) are not expected to be used in future mining operations.
X Co. intends to conduct exploration along a fault at the Property east of the former XXXXXXXXXX Mine ore body in order to identify additional mineral resources and reserves (hereafter referred to as the "East Area").
If proven economical, ore extracted from future mineral reserves identified in the East Area is expected to be brought to the surface using the existing shaft adjacent to the XXXXXXXXXX Mine. The former mining operations at the XXXXXXXXXX Mine were conducted from a ramp accessing the upper part of the deposit. The existing XXXXXXXXXX metre shaft adjacent to the XXXXXXXXXX Mine was not used to hoist ore to the surface.
Purpose of the Proposed Transactions
17. The proposed expenditures will allow the company to gain greater certainty with respect to the mineral XXXXXXXXXX reserves in Zone XXXXXXXXXX. If the programs are successful, assuming favourable XXXXXXXXXX prices and the ability to finance development of the project, the company intends to take the project into production with estimated capital costs of $XXXXXXXXXX to be incurred over a XXXXXXXXXX year pre-production period.
X Co. wishes to issue shares, each of which is intended to qualify as a flow-through share, to assist in financing the exploration and development activities described in paragraphs 11 through 14 above.
Rulings 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 rulings are given:
A. An expense incurred by X Co., after the date of this letter and in respect of exploration programs referred to in paragraphs 11 and 12 above, which is incurred for the purpose of determining the existence, location, extent or quality of a mineral resource in Zone XXXXXXXXXX including any expense incurred in the course of:
(i) prospecting,
(ii) carrying out geological, geophysical, or geochemical surveys,
(iii) drilling by rotary, diamond, percussion, or other methods, or
(iv) trenching, digging test pits, and preliminary sampling,
but not including any Canadian development expense, 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 provided:
a) the expense does not constitute the cost, or any part of the cost, to X Co. of any depreciable property;
b) the expense is incurred before a mine comes into production in reasonable commercial quantities in respect of any mineralization that may be found in Zone XXXXXXXXXX pursuant to the exploration programs referred to above; and
c) if the exploration programs referred to above culminate in the development of a mining operation, such operation is conducted utilizing the Zone XXXXXXXXXX Shaft rather than an extension of a mine that has come into production in reasonable commercial quantities.
B. A mine established at Zone XXXXXXXXXX, in accordance with the mine plan described in paragraph 14 above utilizing the Zone XXXXXXXXXX Shaft, 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 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 Canadian resource property.
The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 issued by the Canada Customs and Revenue Agency (the "Agency") on May 17, 2002 and are binding on the Agency provided that the proposed exploration programs described in paragraphs 11 and 12 above are completed by XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto.
Except as expressly stated, our rulings do 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 the exploration programs referred to in paragraphs 11 and 12 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 17 above will be a flow-through share; or
iv) whether, if economic mineralization is found pursuant to exploration programs which may be undertaken as envisioned in paragraphs 15 and 16 above, such mineralization would be exploited by way of a mine qualifying as a new mine for purposes of the Act.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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