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 costs related to an underground exploration program would constitute CEE.
Position: No. The mine in question previously came into production "in reasonable commercial quantities" and has not lost the characteristics of a mine since it was last shutdown. In addition, if the exploration program is successful, the ore would be mined by way of an extension of the existing underground mine rather than by way of a "new" mine
Reasons: Based upon the facts of the situation and a written opinion received from Natural Resources Canada.
2003-004520
XXXXXXXXXX A.A. Cameron
(613) 347-1361
January 21, 2004
Dear Sir:
Re: XXXXXXXXXX
We are writing in response to your letter of October 16, 2003 requesting consideration of the "potential of using flow-through funding" with regard to an underground exploration program contemplated by XXXXXXXXXX (the "Company) at the above mining property (the "Property") which is located in XXXXXXXXXX.
In particular, your request concerns whether the costs relating to such underground exploration program would qualify as "Canadian exploration expense" ("CEE") as defined in subsection 66.1(6) of the Income Tax Act (the "Act").
Background
Commercial production from the underground mine at the Property commenced in XXXXXXXXXX and up until the mine was placed on care and maintenance in XXXXXXXXXX over XXXXXXXXXX tons of ore was processed with XXXXXXXXXX being recovered. In early XXXXXXXXXX, the broken ore and mining equipment were hoisted out of the mine before it was flooded. The mine has remained flooded since that time. In XXXXXXXXXX, another party carried out an exploration program by way of certain surface drilling. Since that time the Property has been dormant.
The underground exploration program contemplated by the Company would involve de-watering the existing mine shaft and using that shaft to bring in equipment and personnel to carry out the underground drilling. If the exploration program were to be successful in establishing the extension of the known ore zones in sufficient quantities and quality, the existing shaft would be deepened and utilized to extract the ore. In addition, surface facilities, such as the mill, crushers, hoist, compressor, emergency power generator, tailings pond and power line remain at the mine site and available for reactivation for use in the exploration program and any mining operation which may result therefrom.
Personnel from Natural Resources Canada visited the Property in XXXXXXXXXX and after viewing the site of the underground mine which formerly operated at the Property and considering the underground exploration program which the Company is contemplating, they have concluded that:
i) the mine has previously come into production in reasonable commercial quantities;
ii) since being closed in XXXXXXXXXX the mine has not lost the characteristics of a mine; and
iii) if the underground exploration program is successful, it is intended that any resulting mining operation would be conducted by way of an extension of the mine.
Based on the advice of Natural Resources Canada, it is our view that the expenses of the underground exploration program which the Company is contemplating at the Property may reasonably be considered to relate to a potential extension of a mine that "has come into production in reasonable commercial quantities" for purposes of subparagraph (f)(vi) to the definition of CEE and would not relate to a "new mine" for purposes of paragraph (g) of that definition. Consequently, expenditures related to the underground exploration program that the Company is contemplating at the Property would not qualify as CEE.
If you have any questions concerning this matter, please contact Mr. Alan Cameron at (613) 347-1361.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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