Principal Issues: A corporation is involved in Canadian exploration activities and finances itself by issuing flow-through shares. In the course of its exploration activities, the corporation does some bulk sampling and incurs expenses to that effect. The corporation is able to extract a certain quantity of gold from its samples. Whether the expenses incurred by the taxpayer and related to the bulk sampling constitute Canadian exploration expenses ("CEE"). Whether the revenues generated by the sale of the gold must be netted out in computing CEE. Whether the fact that the revenues generated by the sale of the gold are earned in the year subsequent to the year in which the expenses are incurred makes a difference.
Position: General comments. Paragraph (f) of the definition of CEE in subsection 66.1(6) contains a purpose test. The determination as to whether any particular expense incurred by a corporation qualifies as CEE (and more particularly whether the purpose test in paragraph (f) is met), can only be made following a review of the specific facts and circumstances surrounding a particular situation. Paragraph (k.2) of the definition of CEE in subsection 66.1(6) requires that the revenues generated by the sale of the gold in the given situation be netted out in computing CEE. Technically, paragraph (k.2) will apply to such revenues even if they are earned in the year subsequent to the year in which the expenses otherwise described in subparagraph (f)(i), (iii) or (iv) are incurred.
Reasons: Wording of the Act.