2009 Ruling 2008-0290331R3 - Underground exploration program - CEE

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 a proposed underground exploration program will qualify as Canadian exploration expenses under paragraph (f) of the CEE definition.

Position: Yes

Reasons: Based on the facts presented and a written opinion received from Natural Resources Canada.

XXXXXXXXXX 2008-029033

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling - XXXXXXXXXX (the "Corporation")

We are writing in response to your letters of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information provided by the Corporation on XXXXXXXXXX .

The above corporation files its income tax returns under business number XXXXXXXXXX and its head office is located at XXXXXXXXXX . The Corporation is serviced by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.

You have advised us that to the best of your knowledge and that of the responsible officers of the Corporation, none of the issues raised in this ruling is:

(a) identified in an earlier tax return of the Corporation or of a related person;

(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Corporation or of a related person;

(c) under objection by the Corporation or by a related person;

(d) before the courts; or

(e) the subject of a ruling previously issued by the Income Tax Rulings Directorate of the Canada Revenue Agency, to the Corporation or persons related to the Corporation.

DEFINITIONS

In this letter the following terms or expressions have the meanings specified:

"Act" means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended and all statutory references herein are to provisions of the Act, unless otherwise specified,

"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,

"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,

XXXXXXXXXX

"prescribed Canadian exploration and development overhead expense" has the meaning assigned in subsection 1206(4.2) of the Income Tax Regulations,

"principal-business corporation" has the meaning assigned to that term by subsection 66(15) of the Act,

"Project" means the XXXXXXXXXX ,

"public corporation" has the meaning assigned to that term by subsection 89(1) of the Act, and
"taxable Canadian corporation" has the meaning assigned to that expression in subsection 89(1) of the Act.

Our understanding of the facts, proposed transactions and the purposes of the proposed transactions is as follows.

FACTS

1. The Corporation is a public corporation, a taxable Canadian corporation and a principal-business corporation for purposes of the Act.

2. The fiscal period of the Corporation ends on XXXXXXXXXX .

3. The authorized share capital of the Corporation consists of an unlimited number of common shares without par value.

4. The common shares of the Corporation are listed on the XXXXXXXXXX Stock Exchange under the ticker symbol XXXXXXXXXX and are widely held by the public.

5. The business operations of the Corporation include exploration of the Project. The Project comprises XXXXXXXXXX .

Historical facts pertaining to the Project

Facts 6 to 14 provide historical detail with respect to activities carried out on the Project, by persons dealing at arm's length, and prior to the Corporation's acquisition of its interest in the Project property.

6. XXXXXXXXXX staked the Project property in XXXXXXXXXX .

7. Ownership of the Project property was registered in the name of XXXXXXXXXX ("ACo.") during the period XXXXXXXXXX .

8. XXXXXXXXXX . ("BCo.") carried out certain development activities on the Project property in XXXXXXXXXX . These activities included the sinking of a shaft to XXXXXXXXXX feet and excavations (drifting) on XXXXXXXXXX levels. No further work by BCo. was documented after XXXXXXXXXX .

a) These development activities did not lead to the identification of a commercially viable deposit and there is no record of any surface infrastructure (mill etc.) having been being established and, accordingly, no commercial production was received or recorded.

b) XXXXXXXXXX have confirmed that they have no record of commercial production by BCo.

9. The next recorded work on the Project property was completed by XXXXXXXXXX in XXXXXXXXXX where they earned a XXXXXXXXXX % interest in the Project property from ACo.. This interest was subsequently transferred back to ACo. as part of a Plan of Arrangement in XXXXXXXXXX and ACo. changed its name to XXXXXXXXXX .

10. In XXXXXXXXXX , a joint venture was formed between ACo. (XXXXXXXXXX %), XXXXXXXXXX . ("XCo.") (XXXXXXXXXX %) and XXXXXXXXXX ("YCo.") (XXXXXXXXXX %).

11. In XXXXXXXXXX ACo. acquired XCo.'s and YCo.'s respective interests in that joint venture.

12. Between XXXXXXXXXX and XXXXXXXXXX , ACo. carried out extensive surface exploration and also erected surface infrastructure (XXXXXXXXXX ton per day mill complex, and a camp).

a) Underground exploration included drifting, from the existing shaft, on the XXXXXXXXXX foot levels, accompanied by sampling, mapping and XXXXXXXXXX drilling.

b) Activities terminated in XXXXXXXXXX when test milling of a XXXXXXXXXX ton sample were unsuccessful.

c) XXXXXXXXXX have confirmed that they have no record of commercial production by ACo..

The activities described in this paragraph resulted in the estimation of an inferred mineral resource of XXXXXXXXXX tons at grade of XXXXXXXXXX Au opt to a depth of XXXXXXXXXX feet. However the activities did not result in production in reasonable commercial quantities.

13. ACo. encountered financial problems in XXXXXXXXXX which resulted in a lien being placed on the Project property.

14. XXXXXXXXXX ("DCo.") acquired ownership to the Project property XXXXXXXXXX .

Facts pertaining to the Corporation's activities

15. The Corporation entered into two options agreements with DCo. in XXXXXXXXXX and XXXXXXXXXX in which DCo. granted the Corporation the right to earn a XXXXXXXXXX % interest by meeting certain commitments and maintaining annual advance royalty payments. XXXXXXXXXX % ownership of the Project property vested in the Corporation during XXXXXXXXXX .

16. The Corporation has spent over $XXXXXXXXXX dollars on surface exploration on the Project property from the time it entered into the option agreements described in paragraph 15. Exploration activity included trenching and stripping, geological mapping, re-logging of historic holes, surface XXXXXXXXXX drilling, airborne geophysics, ground magnetometer and seismic surveys. In this regard, a significant portion of this amount was recorded as Canadian exploration expense and financed by way of flow-through share financing.

17. In XXXXXXXXXX , drilling from surface by the Corporation encountered encouraging XXXXXXXXXX mineralization in a previously unexplored portion of the Project property.

18. In XXXXXXXXXX , the Corporation announced the discovery of a new zone of mineralization, on the Project property, identified as the XXXXXXXXXX zone. This discovery was made by surface XXXXXXXXXX drilling. The initial intersections of the XXXXXXXXXX zone were approximately XXXXXXXXXX .

19. Currently, there are no known mineral reserves on the Project property. There has never been a mine that has come into production in reasonable commercial quantities on the Project property.

PROPOSED TRANSACTIONS

20. In order to adequately explore for extensions of the currently identified mineralization, and also explore for additional areas of mineralization nearby, the Corporation has identified that additional drilling will be required in the XXXXXXXXXX zone. The Corporation has also recognized that this would most effectively be completed from the underground due to the following factors:

* Ease of access.

* Cost of drilling from surface.

* XXXXXXXXXX .

* Advantage of gaining three-dimensional geological information.

As a result, underground exploration (while preferable), is most viable by extending the existing shaft and carrying out underground excavation to access the XXXXXXXXXX zone. Accordingly, the Corporation proposes to undertake an underground exploration program in the XXXXXXXXXX zone (the "Proposed Underground Exploration Program"), which is described in the following paragraphs.

21. With respect to the timing of the Proposed Underground Exploration Program:

* All permit applications have been completed and submitted for the dewatering and shaft rehabilitation. The Corporation has received the permit XXXXXXXXXX and is awaiting the XXXXXXXXXX Certificate XXXXXXXXXX and the XXXXXXXXXX Certificate XXXXXXXXXX , which are expected in XXXXXXXXXX .

* Phase Two shaft deepening and drifting is proposed to commence in XXXXXXXXXX

22. The following outlines the currently planned work program for the Proposed Underground Exploration Program:

a) Hoist and shaft rehabilitation.

b) Dewatering of the shaft and working to allow further shaft deepening and drift excavation to take place.

c) Extend the existing shaft by XXXXXXXXXX metres, from XXXXXXXXXX metres to XXXXXXXXXX metres.

d) Drive a drift XXXXXXXXXX from the base of the shaft to intersect the area of the XXXXXXXXXX occurrence.

e) Drill between XXXXXXXXXX of drilling from underground to evaluate the XXXXXXXXXX zone and other new targets.

f) Ancillary work required to keep the underground workings viable for working ventilation and pumping of water.

23. The cost of the shaft dewatering and rehabilitation is expected to be approximately $XXXXXXXXXX .

24. The cost of the XXXXXXXXXX Phase Two shaft deepening and drifting is expected to be as follows:

a) Shaft Deepening					$XXXXXXXXXX 
b) Underground drifting and installation of 
ventilation and pump stations  			$XXXXXXXXXX 
c) XXXXXXXXXX  drilling				$XXXXXXXXXX 
d) Geological sampling and mapping 			$XXXXXXXXXX 
e) Unallocated Exploration - drilling etc		$XXXXXXXXXX 
Total Proposed XXXXXXXXXX  cost			$XXXXXXXXXX 

PURPOSE OF THE PROPOSED TRANSACTIONS

25. The expenditures proposed to be incurred to complete the proposed work will allow the Corporation to gain greater confidence and certainty with respect to the location, nature, extent and quality of the XXXXXXXXXX resources on the Project property. If the Proposed Underground Exploration Program proves successful, and assuming a positive production decision can be made, and a mine development financed, then the Corporation intends to take the project to production.

26. The Corporation wishes to issue flow-through shares to assist in financing the Proposed Underground Exploration Program. The ability to finance with flow-through shares depends upon the ability of the proposed expenditures to qualify as Canadian exploration expenses for the purposes of paragraphs (f) of the definition of "Canadian exploration expense" in subsection 66.1(6) of the Act.

27. The Corporation will renounce Canadian exploration expenses to the flow-through shareholders in accordance with the provisions of subsections 66(12.6) and 66(12.66) of the Act.

RULING

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:

A. An expense incurred by the Corporation, after the date of this letter, and in respect of the Proposed Underground Exploration Program, which is incurred for the purpose of determining the existence, location, extent or quality of a mineral resource in the XXXXXXXXXX zone, including any expense incurred in the course of:

(i) prospecting,
(ii) carrying out geological, geophysical, or geochemical surveys,
(iii) drilling by rotary, XXXXXXXXXX , 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 the Corporation pursuant to paragraph (f) of 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 the Corporation of any depreciable property; and
(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 the XXXXXXXXXX zone pursuant to the Proposed Underground Exploration Program.

COMMENTS

Except as expressly stated, our ruling does 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) whether any particular expense, referred to in paragraphs 23 and 24, incurred by the Corporation in respect of the Proposed Underground Exploration Program, will qualify as Canadian exploration expense of the Corporation,
(ii) whether the Corporation is a principal business corporation and whether any share issued by the Corporation as contemplated in paragraph 26 above will be a flow-though share, and
(iii) whether any particular expense incurred by the Corporation in respect of the Proposed Underground Exploration Program will constitute a prescribed Canadian exploration and development overhead expense for the purposes of paragraph 66(12.6)(b) of the Act.

The above ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 issued by the Canada Revenue Agency (the "CRA") on May 17, 2002 and is binding on the CRA provided that the Proposed Underground Exploration Program is completed by XXXXXXXXXX .

This ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments thereto.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislation Policy Regulatory and Affairs Branch