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.
Principal Issues: Whether expenses relating to an exploration program will qualify for inclusion under paragraph (f) to the definition of CEE? Whether a mine which may be established will be a "new mine" for the purposes of paragraph (g) to the definition of CEE?
Position: Expenses incurred in respect of the proposed exploration program may potentially qualify under paragraph (f) to the definition of CEE. A mine established in accordance with the mine plan described herein would be a "new mine" for the purposes of paragraph (g) of the definition of CEE.
Reasons: Based on the facts presented to us and a written opinion received from Natural Resources Canada dated XXXXXXXXXX . A representative of that Department visited the site and reached conclusions that supported the positions described above.
XXXXXXXXXX 2004-008870
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayer. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request.
We understand that to the best of your knowledge, and that of the taxpayer involved, none of the issues involved in the Ruling request:
(a) is in an earlier return of A Co. or a related person;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed return of A Co., or a related person;
(c) is under objection by A Co., or a related person;
(d) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate of the Canada Revenue Agency.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Definitions
In this letter, the following terms have the meanings specified:
(a) "A Co." means XXXXXXXXXX;
(b) "Canadian development expense" or "CDE" has the meaning ascribed to that term in subsection 66.2(5) of the Act;
(c) "Canadian exploration expense" or "CEE" has the meaning ascribed to that term in subsection 66.1(6) of the Act;
(d) "flow-through share" has the meaning ascribed to that term in subsection 66(15) of the Act;
(e) "Mine A" means the XXXXXXXXXX;
(f) "Mineral" means XXXXXXXXXX;
(g) "Property" means the XXXXXXXXXX;
(h) "public corporation" has the meaning ascribed to that term in subsection 89(1) of the Act;
(i) "taxable Canadian corporation" has the meaning ascribed to that term in subsection 89(1) of the Act;
(j) "Zone A" means the surface ore zone described in paragraph 14 below; and
(k) "Zone B" means the deep ore zone described in paragraph 13 below.
Facts
1. A Co. is a corporation incorporated under the laws of the XXXXXXXXXX.
2. A Co. maintains its registered office at XXXXXXXXXX. A Co. maintains its principal executive office at XXXXXXXXXX.
3. The authorized share capital of A Co. consists of an unlimited number of common shares. As at XXXXXXXXXX, A Co.'s issued share capital consisted of XXXXXXXXXX common shares.
4. A Co. is a taxable Canadian corporation and a public corporation. The shares of A Co. are listed for trading on the XXXXXXXXXX Stock Exchange and the XXXXXXXXXX Stock Exchange.
5. For the purposes of the Act, the taxation year of A Co. ends on XXXXXXXXXX. A Co. files its federal income tax returns with the XXXXXXXXXX Tax Services office.
6. The publicly filed documents of A Co. describe its business as the exploration, development and mining of the Mineral. As such, A Co. is a "principal business corporation" as that term is defined in subsection 66(15) of the Act.
7. On XXXXXXXXXX, for the purpose of embarking on a Mineral exploration program at the Property, A Co. entered into an agreement to purchase the Property, including all related assets, from the owners thereof, who dealt at arm's length with A Co. The purchase was completed on XXXXXXXXXX.
8. The former Mine A is situate on the Property. Site preparation of Mine A began in XXXXXXXXXX and, by XXXXXXXXXX, the portal of the decline was collared. Statements of the operator of Mine A indicate that commercial production of the Mineral commenced on XXXXXXXXXX and continued until XXXXXXXXXX at which time the decline had reached the XXXXXXXXXX metre level. At that point the ramp mining method employed in the production from Mine A was determined to have reached its economical limit as a means of bringing the Mineral to the surface.
9. Reported Mineral production of Mine A in XXXXXXXXXX.
10. When production at Mine A ceased on XXXXXXXXXX, the property was placed on care and maintenance with a staff of XXXXXXXXXX individuals who tended to the property until it was acquired by A Co. Until that time the portal of the decline of Mine A was not blocked so that the decline could be used to inspect the underground workings and to survey the water level. The office buildings and the mine dry on site were used by the individuals caring for the property.
11. In XXXXXXXXXX, A Co. embarked on a "grass roots" Mineral exploration and development program on the Property. This program involved the drilling of XXXXXXXXXX surface core holes for a total of XXXXXXXXXX metres of drilling. Both shallow and deep ore zones were targeted.
12. The program intersected significant Mineral mineralization in both near-surface drilling and down-dip of the area mined by the former owners of the Property, as well as along strike. The deep ore zones are not connected to shallow ore zones on the Property, but do share the structural setting provided by the XXXXXXXXXX. The initial results of the deep drilling program indicated that further exploration was warranted.
13. Before proceeding with the development of an underground mine with respect to the new deep ore zones, being Zone B, A Co. will need to establish what proven and probable Mineral reserves exist on the Property in that regard. Further surface drilling is impractical for these purposes due to the thick overburden on the surface of the area to be tested, as well as the nature of the rocks which make it very difficult to attain a regular pattern of drilling at the depth to be tested, resulting in loss of accuracy of the drill spacing. Accordingly, in order to further the exploration of Zone B, it was decided that underground drilling would be the preferred option. In preparation for the underground exploration program, A Co. has driven the ramp of Mine A further down to establish an exploration drift for XXXXXXXXXX drilling at the XXXXXXXXXX metre level. A cross cut was driven over XXXXXXXXXX metres southwest from the lowest part of the old workings of Mine A and a XXXXXXXXXX metre long exploration drift with drill platforms was constructed in the hanging wall at the XXXXXXXXXX metre level below the surface.
14. The pre-feasibility study conducted on the shallow drilling results above the XXXXXXXXXX metre level indicated proven and probable reserves of XXXXXXXXXX of the Mineral for a proposed open pit mining operation in respect of Zone A. A technical report in compliance with disclosure and reporting requirements set forth in the National Instrument 43-101 was filed in the first quarter of XXXXXXXXXX.
15. A Co. has a conceptual mining plan in which it will begin by developing an open pit mine near-surface mineralization in respect of Zone A and, in a second phase, an underground mine in respect of Zone B will be developed if sufficient ore is discovered below the XXXXXXXXXX metre level. The proposed location of the shaft for the conceptual underground mining operation is approximately XXXXXXXXXX km. southeast of the existing portal to Mine A.
Proposed Transactions
16. A Co. will begin by developing an open pit mine to mine near-surface mineralization. The open pit mine in respect of Zone A will mine ore from surface to the XXXXXXXXXX metre level. The pit will excavate the near-surface ore zones in respect of Zone A that were discovered by A Co.'s XXXXXXXXXX exploration program along with zones that were not mined during the prior owner's underground mining operation.
17. The extent of the open pit is such that the portal and the ventilation raise used during the exploitation of Mine A will be mined out. The fans over the ventilation raise on the surface will be relocated over the future ventilation raise. The propane tank used to heat the fresh air pushed underground to ventilate the workings of Mine A, the electrical substation adjacent to the propane tank and the compressor room will be relocated because the excavation of the open pit will extend to its location.
18. From the newly constructed drilling platforms, A Co. will undertake an underground exploration program in respect of Zone B (the "Proposed Underground Exploration Program") that is estimated to be completed by XXXXXXXXXX. A Co. proposes to raise approximately $XXXXXXXXXX to fund expenses that will be incurred in connection with such exploration within the next XXXXXXXXXX months.
19. The Proposed Underground Exploration Program includes the development of an underground ramp access from the XXXXXXXXXX metre level down to the XXXXXXXXXX metre level and the required exploration drifts, followed by an underground drilling program of approximately XXXXXXXXXX metres of core drilling from the drift. As all of the actual existing reserves of the Mineral on the Property are located above the XXXXXXXXXX metre level, the drilling objective is to significantly increase reserves and mineralization below the XXXXXXXXXX metre level. The ramp built in connection with the mining of Mine A is being used by A Co. only for the purpose of its extension for exploration purposes and will not be used for any other purpose.
20. In particular, the Proposed Underground Exploration Program will include the following:
(a) extending the XXXXXXXXXX metre level another XXXXXXXXXX metres along strike to further delineate recent intercepts on both the eastern and western ends of the mineralized zones of Zone B;
(b) extending the underground ramp of Mine A down from the XXXXXXXXXX metre level to the XXXXXXXXXX metre level, which would involve approximately XXXXXXXXXX metres of decline plus muckbays;
(c) developing a strike length drill drift in the hanging wall of Zone B to allow for definition drilling of the mineral zones below the XXXXXXXXXX metre level. The total length of the drift would be approximately XXXXXXXXXX metres, including drill cutouts; and
(d) continuing deep underground drilling from the XXXXXXXXXX metre level. Until the drill drift is complete, it is assumed underground drilling will continue from the XXXXXXXXXX metre level.
21. Further particulars of the Proposed Underground Exploration Program on the Property as described above, are depicted in diagrams that were provided to us.
22. A Co. proposes to finance the Proposed Underground Exploration Program, in part, through a $XXXXXXXXXX private placement of common shares which are intended to be flow-through shares. A Co. intends to renounce CEE to the shareholders who subscribe for flow-through shares in accordance with the provisions of subsections 66(12.6) and 66(12.66) of the Act.
Purpose of the Proposed Transactions
23. The Proposed Underground Exploration Program is being undertaken with the objective of determining the existence, location, extent and quality of the mineralized zones below the known resources so as to increase A Co.'s Mineral reserve position with regard to the Property. More accurate information regarding the quality and quantity of such Mineral reserves will enable a decision to be taken regarding the development of an underground mining operation on the Property.
Rulings Requested and Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our Ruling is as follows:
We confirm that, subject to Comment (ii) below, an expense incurred by A Co., after the date of this letter and in respect of the Underground Exploration Program (referred to in paragraphs 18 to 21 above), which is incurred for the purpose of determining the existence, location, extent or quality of a mineral resource in Zone B, 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 a Canadian exploration expense of A 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 A 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 B pursuant to the Underground Exploration Program; and
(c) if the exploration program referred to above culminates in the development of a mining operation, such operation is conducted utilizing a new shaft for Zone B rather than an extension of a mine that has come into production in reasonable commercial quantities.
Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications relating to 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 A Co. in respect of the Underground Exploration Program (referred to in paragraphs 18 to 21 above) will qualify as Canadian exploration expense of A Co. For example, it is our view that expenses that are incurred in order to determine the economic feasibility of whether or not to proceed with developing a new mine, or that are related to the processing or sale of the mined mineral do not satisfy the purpose test of paragraph (f) of the definition of Canadian exploration expense, and
iii) whether A Co. is a "principal business corporation" as defined in subsection 66(15) of the Act or whether any share in the capital stock of A Co. which is issued as envisioned in paragraph 22 above will be a "flow-through share".
The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued by the Canada Revenue Agency (the "Agency") on May 17, 2002 and are binding on the Agency with respect to expenses of the Underground Exploration Program, described in paragraphs 18 to 21 above, that are incurred on or before 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.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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