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 cost of a pre-feasibility study and a feasibility study related to a proposed XXXXXXXXXX would constitute CRCE.
Position: Whether or not a particular expenditure will constitute CRCE must be determined from the facts of a particular situation. General comments given respecting aspects of such studies which may constitute CRCE.
Reasons: Nature of the determination.
XXXXXXXXXX 2003-002382
A. A. Cameron
(613) 347-1361
July 18, 2003
Dear XXXXXXXXXX:
Re: XXXXXXXXXX (the "Corporation")
XXXXXXXXXX
We are writing further to our letter of June 23, 2003 (the "Letter") acknowledging receipt of a referral dated June 9, 2003 from Mr. Tom Jewett of Natural Resources Canada (the "Department") regarding the subject matter. In your letter of July 7, 2003 and during our various telephone conversations (XXXXXXXXXX/Cameron), you have clarified that you are seeking our opinion on certain matters pertaining to the above matter.
As noted in the Letter, you wrote to Mr. Jewett on March 27, 2003, stating that the Corporation is looking into the viability of a XXXXXXXXXX to be located at XXXXXXXXXX. In the March 27 letter, you requested an opinion on technical eligibility of this proposed XXXXXXXXXX [i.e., whether costs of this proposed XXXXXXXXXX would qualify to be included in Class 43.1 under Schedule II of the Income Tax Regulations (the "Regulations")]. You also requested clarification on whether expenditures to be incurred in respect of a two-phased bankable feasibility study would qualify as "Canadian renewable and conservation expense" ("CRCE") pursuant to section 1219 of the Regulations.
As noted in our Letter, the conclusion expressed in the June 9 referral letter from the Department was that, given the proposed XXXXXXXXXX is still in the early stages of project planning and the process engineering thereof has not been completed, it was not possible for them to provide a technical opinion on Class 43.1 eligibility for this proposed XXXXXXXXXX at this time. Therefore, we advised you that we are unable to provide an opinion on whether costs related to this proposed XXXXXXXXXX would qualify to be included in Class 43.1 under Schedule II of the Regulations.
You have indicated in your letter of July 7, 2003 that a pre-feasibility study with respect to the above XXXXXXXXXX will be completed by the end of XXXXXXXXXX at an estimated cost of $XXXXXXXXXX. Upon completion thereof, it is intended that work will commence on a bankable feasibility study with respect to the XXXXXXXXXX, to be completed before the end of XXXXXXXXXX at an estimated cost of $XXXXXXXXXX to $XXXXXXXXXX. Third parties with whom the Corporation deals at arm's length for purposes of the Act will complete each of these studies.
In addition, you have submitted with your letter of July 7, 2003, a copy of the "XXXXXXXXXX prepared by the third party engineering firm hired to complete same. It stated that the objective of the above-mentioned pre-feasibility study was to determine the economic viability of the above XXXXXXXXXX. The key aspects of the study are:
XXXXXXXXXX.
You have indicated in your letter of July 7, 2003 that the scope of the bankable feasibility study will be similar to that outlined above in respect of the pre-feasibility study, but in much greater detail.
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 submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency.
The determination of whether a particular expense incurred by a taxpayer will qualify for inclusion in CRCE must be made based upon a review of all of the facts relevant to a particular situation. However, in our view, expenses incurred by a taxpayer in respect of the development of a project for which it is reasonable to expect that at least 50% of the capital cost of the depreciable property to be used in the project would be the capital cost of any property that is described in Class 43.1 of Schedule II to the Regulations, including the portion of the cost of a pre-feasibility study or feasibility study for such a project which relate to the aspects listed above, will generally constitute CRCE to the taxpayer provided they are payable to a person with whom the taxpayer is dealing at arm's length and to the extent they are not specifically excluded from CRCE under subsection 1219(2) of the Regulations, e.g., certain expenses in respect of overhead and management, financing and interest, or the acquisition, or use of, land.
Pursuant to paragraph (g.1) of the definition of "Canadian exploration expense" ("CEE") in subsection 66.1(6) of the Act, expenses incurred by a taxpayer that qualify for inclusion in CRCE will also be included in the taxpayer's CEE. A taxpayer that qualifies as a "principal-business corporation" [as defined in subsection 66(15) of the Act] may be able to renounce amounts, in respect of the CEE incurred by it, to an investor that has acquired a "flow-through share" [also as defined in subsection 66(15) of the Act] in its capital stock. However, amounts may only be renounced to a particular investor in respect of CEE incurred by the taxpayer on or after the date the agreement in writing relating to the acquisition of the flow-through share was made.
We trust that these comments will be of assistance.
Yours truly,
Mickey Sarazin, C.A.
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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