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 new mine will qualify for inclusion under paragraph (g) of the definition of CEE.
Position: Some of the expenses will qualify.
Reasons: Based upon the facts and a written opinion from Natural Resources Canada.
XXXXXXXXXX
2010-035572
XXXXXXXXXX, 2012
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge receipt of updated submissions received on XXXXXXXXXX.
We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request are:
(i) in an earlier return of the taxpayer or a related person,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,
(iii) under objection by the taxpayer or a related person,
(iv) before the courts, or
(v) the subject of a ruling previously considered by the Directorate involving the taxpayer or a related person.
DEFINITIONS
In this letter, the following terms have the meanings specified:
“Act” means the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter;
“Canadian development expense” has the meaning assigned to that term by subsection 66.2(5) of the Act;
“Canadian exploration expense” (“CEE”) has the meaning assigned to that term by subsection 66.1(6) of the Act;
“Canadian exploration and development overhead expense” has the meaning assigned to that term by subsection 1206(1) of the Income Tax Regulations;
“Canadian resource property” has the meaning assigned to that term by subsection 66(15) of the Act;
“Corporation” means XXXXXXXXXX;
“flow-through share” has the meaning assigned to that term by subsection 66(15) of the Act;
“mineral resource” has the meaning assigned to that term by subsection 248(1) of the Act;
“XXXXXXXXXX” is a fault displacement of the XXXXXXXXXX that was discovered between XXXXXXXXXX;
“XXXXXXXXXX” is described in paragraph 16;
“principal-business corporation” has the meaning assigned to the term by subsection 66(15) of the Act;
“Property” means XXXXXXXXXX of mineral claims and leases XXXXXXXXXX owned by the Subsidiary and located XXXXXXXXXX. The Subsidiary holds XXXXXXXXXX mining leases and XXXXXXXXXX mineral claims. Some but not all of the leases and mineral claims include ownership of the surface rights;
“public corporation” has the meaning assigned by subsection 89(1) of the Act;
“XXXXXXXXXX” means the Subsidiary’s mine site located on the Property and consisting of an open pit mine and an underground mine;
“XXXXXXXXXX” means the open pit mine located on the Property;
“XXXXXXXXXX” means the underground mine located on the Property;
“XXXXXXXXXX” means the area extending beneath the XXXXXXXXXX;
“Subsidiary” means XXXXXXXXXX, which is wholly-owned by the Corporation; and
“taxable Canadian corporation” has the meaning assigned to that term by subsection 89(1) of the Act.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
FACTS
1. The Corporation was formed in XXXXXXXXXX as a result of an amalgamation under the Canada Business Corporations Act. The Corporation is a taxable Canadian corporation, a public corporation and a principal-business corporation, with a taxation year end of XXXXXXXXXX. The head office of the Corporation is located at XXXXXXXXXX. The Corporation is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre. Its business number is XXXXXXXXXX. The Corporation’s principal business is the exploration for and mining of mineral resources in Canada.
2. The Subsidiary was incorporated under the Canada Business Corporations Act on XXXXXXXXXX. The Subsidiary has a taxation year end of XXXXXXXXXX. The Subsidiary is a taxable Canadian corporation as well as a principal-business corporation. The Subsidiary’s head office is located at XXXXXXXXXX. The Subsidiary is served by the XXXXXXXXXX Tax Services office and the XXXXXXXXXX Taxation Centre. Its business number is XXXXXXXXXX.
3. Currently, the Subsidiary owns the XXXXXXXXXX which lies in XXXXXXXXXX. The XXXXXXXXXX consists of the XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX milling facilities (XXXXXXXXXX). Also located on the Property are XXXXXXXXXX.
4. The XXXXXXXXXX was developed in XXXXXXXXXX. The Subsidiary began mining the XXXXXXXXXX by way of open pit mining. Commercial production of the XXXXXXXXXX began in XXXXXXXXXX at a rate of XXXXXXXXXX per day.
5. In XXXXXXXXXX, the Subsidiary commenced an expansion at the XXXXXXXXXX. A new mill was commissioned in the XXXXXXXXXX which achieved a rated XXXXXXXXXX per day throughput in XXXXXXXXXX.
6. Between XXXXXXXXXX and XXXXXXXXXX, an extensive drilling campaign identified mineralization, below the ultimate pit bottom. The exploration drilling identified XXXXXXXXXX separate deposits with potential for underground mining: the “XXXXXXXXXX” extending beneath the XXXXXXXXXX, and the “XXXXXXXXXX”, a fault displacement of the XXXXXXXXXX.
7. Underground development of the XXXXXXXXXX commenced in XXXXXXXXXX by constructing a ramp. The XXXXXXXXXX was accessed in late XXXXXXXXXX. Underground commercial production began on XXXXXXXXXX. Process improvements to improve mill performance were undertaken in XXXXXXXXXX and in the last quarter of XXXXXXXXXX mill availability reached XXXXXXXXXX% and XXXXXXXXXX recovery rose to XXXXXXXXXX%.
8. The XXXXXXXXXX appears to be terminated down dip by a relatively shallow dipping fault. Below this structure, the XXXXXXXXXX, a zone with similar but higher grade base metal mineralization than the XXXXXXXXXX, has been intersected by exploration drill holes. The XXXXXXXXXX is displaced down and approximately XXXXXXXXXX of the XXXXXXXXXX.
9. The XXXXXXXXXX was developed through a portal and a ramp drive from the open pit wall on the XXXXXXXXXX that extends XXXXXXXXXX below surface. The ore from the XXXXXXXXXX was hauled to the surface by trucks using the ramp access. The mining method employed at the XXXXXXXXXX was XXXXXXXXXX. The mining block interval was XXXXXXXXXX floor to floor with XXXXXXXXXX sublevels in between and XXXXXXXXXX sill pillars between the blocks. The stopes were on average XXXXXXXXXX in length. Vertical rib pillars of XXXXXXXXXX to XXXXXXXXXX wide were left between the stopes to support the integrity of the openings. The ventilation to the underground workings was provided by a fresh air downcast ventilation raise located outside the ultimate open pit limits. The tainted air exhausted up the ramp. As it is required by legislation to have two egress exits, the ventilation raise also served as the second egress exit.
10. On XXXXXXXXXX the XXXXXXXXXX site was temporarily placed on care and maintenance due to low metal prices. At the time the mines were placed on temporary care and maintenance, the XXXXXXXXXX had XXXXXXXXXX at the current rate of production. The XXXXXXXXXX has an expected remaining life of approximately XXXXXXXXXX years.
11. The XXXXXXXXXX site was restarted in early XXXXXXXXXX.
12. The following constructions and services were installed to assist in the mining of the XXXXXXXXXX and the XXXXXXXXXX: XXXXXXXXXX
XXXXXXXXXX. At the time of exploring and developing the proposed XXXXXXXXXX, these facilities were still operational on the property with the exception of the original processing plant which was decommissioned in XXXXXXXXXX. The original processing plant had a capacity of XXXXXXXXXX per day; it was eventually replaced by a XXXXXXXXXX per day capacity plant.
13. There is no current production from the XXXXXXXXXX below the XXXXXXXXXX level.
14. The XXXXXXXXXX has been traced for XXXXXXXXXX for XXXXXXXXXX at depths of XXXXXXXXXX, so far, by exploration drilling. On XXXXXXXXXX the Subsidiary announced that it would begin development in XXXXXXXXXX of a new XXXXXXXXXX ramp over a depth of XXXXXXXXXX that would take approximately XXXXXXXXXX to complete. This initial development of the XXXXXXXXXX provided access for a platform for further exploration drilling and for the installation of a raised-bored shaft to surface in combination with a high-volume bulk mining method. No production resulted from this initial development.
15. The Subsidiary intends to mine the XXXXXXXXXX in XXXXXXXXXX. In the XXXXXXXXXX.
PROPOSED TRANSACTIONS
16. XXXXXXXXXX, the Subsidiary intends to develop the XXXXXXXXXX using a new production shaft, underground workings below the XXXXXXXXXX level and the surface facilities such as the head frame, hoists and compressors (the “XXXXXXXXXX”). The workings will include a temporary loading pocket that will be located below the XXXXXXXXXX level.
17. The production shaft will be raised bore from the XXXXXXXXXX level using the access provided by the extended ramp. The ramp will be used to raise bore the first XXXXXXXXXX of the shaft. The lower section of the production shaft, the remaining XXXXXXXXXX, will be sunk conventionally using a XXXXXXXXXX. The production shaft will be XXXXXXXXXX with a XXXXXXXXXX diameter. It will have XXXXXXXXXX. The production shaft will ultimately be sunk down to the XXXXXXXXXX level. It will serve as the main ventilation fresh air intake to the XXXXXXXXXX workings. The production shaft will also be the primary means for the miners to access their underground workings on a daily basis. It will also be the only way the ore and waste will be hoisted to the surface. The hoisting capacity of the shaft-hoist arrangement will be XXXXXXXXXX per day of ore and XXXXXXXXXX per day of waste material for a total capacity of XXXXXXXXXX per day from the XXXXXXXXXX level. The head frame will be a structural steel construction with a clad/insulated exterior and a conventional back-leg arrangement. The hoist-house building will accommodate XXXXXXXXXX drum hoists: production, service and auxiliary hoist, and a stand-by generator for powering the hoists in case of emergency.
18. The planned method for mining for the XXXXXXXXXX Mining will be different from the mining method that is used at the XXXXXXXXXX. The Subsidiary proposes to use XXXXXXXXXX mining sequences will be used for all the mining areas. Some places will use XXXXXXXXXX. Backfilling will be done with XXXXXXXXXX. Mucking will be done by conventional low profile high capacity front end loaders. XXXXXXXXXX. The rock breakers will also be operated from the surface or from the crusher. XXXXXXXXXX. The mining block interval is XXXXXXXXXX floor to floor with XXXXXXXXXX sublevels in between and XXXXXXXXXX sill pillars between blocks.
19. The Subsidiary estimates that using this new planned method of mining will require approximately XXXXXXXXXX employees. These will be experienced and skilled employees. The new mine will require employees to operate scoop trams and the underground crusher.
20. Initially, the Subsidiary proposes to develop and mine the ore zone between the XXXXXXXXXX and the XXXXXXXXXX elevations. Extraction horizon levels are envisaged to be developed on XXXXXXXXXX levels. Vertical spacing between subsills will be XXXXXXXXXX sill to sill. The ore will be mucked to XXXXXXXXXX orepasses located on each level, which will be located at the center, north and south half of the ore zone. The orepasses will feed a central underground crusher and a XXXXXXXXXX meter conveyor will transport the ore from the crusher to the shaft loading station. It will then be put into an ore bin with a capacity of XXXXXXXXXX prior to being hoisted to the surface using XXXXXXXXXX skips.
21. The proposed new hoisting system has been designed for a production rate of XXXXXXXXXX per day. The hoisting plant will operate as a balanced skip hoisting arrangement. It will initially operate from the XXXXXXXXXX level but will ultimately operate from the XXXXXXXXXX level in the future depending on the limits of the ore body. The new hoist and shaft will be sized to allow for expansion to this mining horizon. Once the new facilities are completed it is anticipated that the underground miners will access the areas in the underground operations using the new mine shaft.
22. The Subsidiary proposes to install new ramp access from the XXXXXXXXXX level of the XXXXXXXXXX. The ramp will cross the XXXXXXXXXX from the hanging wall side at the XXXXXXXXXX level. The ramp will be used for equipment access to the XXXXXXXXXX through the existing XXXXXXXXXX.
23. The total new ramp development, as described in paragraph 22 above, will be approximately XXXXXXXXXX. Initially, level accesses will be developed only as required to advance the ventilation in advance of production drilling. The ramp can also be designated as a second means of egress for the XXXXXXXXXX.
24. Prior to the startup of the XXXXXXXXXX, a ventilation raise system will be developed from the bottom of the XXXXXXXXXX ramp to the surface. A XXXXXXXXXX diameter exhaust raise will be developed from the XXXXXXXXXX level to the surface on the west side of the pit. Approximately XXXXXXXXXX cubic metres per second of air will be required, XXXXXXXXXX cubic metres per second of which will be supplied via the main shaft. The remaining air will be supplied from the existing XXXXXXXXXX ventilation system. Contaminated air will be exhausted up the XXXXXXXXXX and the XXXXXXXXXX ramp.
25. The expected production rate for the XXXXXXXXXX is based on supplying the mill with XXXXXXXXXX per day for the life of the project, based on XXXXXXXXXX% mill availability and XXXXXXXXXX milling days available per year.
26. The new shaft facility for the XXXXXXXXXX will be a highly automated, integrated facility with full time monitoring and control of all process systems on site. The entire hoisting plant will be monitored from a new control facility which will be at the shaft facility.
27. The Subsidiary proposes to construct several new systems on the surface to support the XXXXXXXXXX, including a headframe, hoist house, dry and surface ore handling system. Once the XXXXXXXXXX commences production, the XXXXXXXXXX infrastructure will be used only as an escape way for ventilation exhaust and for mobile equipment access.
28. A new XXXXXXXXXX substation will be constructed at the collar of the shaft. This will be the primary electrical distribution for the new XXXXXXXXXX. The incoming site power that feeds the existing Subsidiary’s substation will be fed into the new substation.
29. New additional compressors will be acquired in order to supply compressed air and will be located in the new hoist house. XXXXXXXXXX, therefore, additional compressed air will be required for mining operations. When the XXXXXXXXXX is depleted, the compressed air requirements will decrease.
30. New water stations will be installed in the shaft and water sent underground in a XXXXXXXXXX pipe located in the shaft. Mine inflow water will be collected in small sumps on each level and sent to main dewatering sumps, located on each sub-level near the ramp.
31. A new mobile maintenance shop will be constructed on the XXXXXXXXXX level near the ramp and will be used to perform all preventative and breakdown maintenance on mobile trackless mining equipment. A fuel bay will also be constructed near the maintenance shop.
32. A new main refuge station will be constructed on the XXXXXXXXXX levels and a new portable refuge station will be located near where the drillers and blasters are working.
33. A new large storage area for mining consumables including pipe fittings, ground support materials, ventilation supplies, etc. will be developed on the XXXXXXXXXX level.
34. Mill process systems will require some re-engineering to improve recoveries of the ore extracted from the XXXXXXXXXX. Metallurgically, the XXXXXXXXXX should behave very much like the XXXXXXXXXX.
35. In order to accommodate the increased production from the development of the XXXXXXXXXX, the existing tailings management facility will continue to be expanded over time. Additionally, these tailings will also be convenient for backfilling in the underground as a further change from the XXXXXXXXXX as well as being a means of minimizing surface tailings storage impacts.
36. The Subsidiary proposes to spend approximately $XXXXXXXXXX on the surface and underground infrastructure to develop the XXXXXXXXXX. The Corporation and its Subsidiary are considering financing the proposed new mine through the issuance of flow-through shares and intend to renounce CEE to the flow-through share investors. Additional flow-through share financings may be entered into from time to time, the proceeds of which may be used for expenditures discussed above.
37. On XXXXXXXXXX, a favourable advance income tax ruling (XXXXXXXXXX) was issued concerning expenses qualifying under paragraph (f) of the definition of CEE related to proposed drilling programs to be undertaken on XXXXXXXXXX other zones on the Property.
38. On XXXXXXXXXX, a favourable advance income tax ruling (XXXXXXXXXX) was issued concerning expenses qualifying under paragraph (f) of the definition of CEE related to a proposed exploration drilling program to be undertaken on the XXXXXXXXXX on the Property.
PURPOSE OF PROPOSED TRANSACTIONS
39. The Proposed Transactions are being undertaken for the purpose of developing a new mine using a completely different mining methodology and underground support infrastructure, a surface and underground backfill plant, a new production shaft and a new mining method to produce ore from the XXXXXXXXXX.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions and the Purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:
A) The XXXXXXXXXX described in paragraph 16 above that will include the underground workings below the XXXXXXXXXX level, and the new production shaft in its entire length, will be considered a new mine in a mineral resource.
B) Any expense other than
a) any expense that results in revenue or can reasonably be expected to result in revenue earned before the new mine comes into production in reasonable commercial quantities, except to the extent that the total of all such expenses exceeds the total of those revenues;
b) any expense that constitutes the cost, or any part of the cost to the Subsidary of any depreciable property or any Canadian resource property;
c) any expense with respect to any stope or part of a stope that will be mined through the XXXXXXXXXX and the XXXXXXXXXX
that will be incurred by the Subsidiary for the purpose of bringing the XXXXXXXXXX referred to in Ruling A into production in reasonable commercial quantities, and incurred before the new mine comes into production in such quantities will be a CEE of the Subsidiary within the meaning of paragraph (g) of the definition contained in subsection 66.1(6) of the Act.
Except as expressly stated, these rulings do 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:
(a) the reasonableness of any expenditure referred to in this letter;
(b) whether any particular expense referred to in paragraphs 16 to 35 above will qualify as CEE of the Subsidiary. In particular, it is our view that any expense incurred with the development of the XXXXXXXXXX above the XXXXXXXXXX level will not qualify as CEE;
(c) whether any particular expense not considered to be CEE will qualify as a Canadian development expense;
(d) whether the Corporation or the Subsidiary is a principal-business corporation;
(e) whether any share of the capital stock of either the Corporation or the Subsidiary which may be issued will be a flow-through share; and
(f) whether any particular expense incurred by the Subsidiary will constitute a prescribed Canadian exploration and development overhead expense for the purpose of paragraph 66(12.6)(b).
The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the Subsidiary has commenced implementing the Proposed Transactions 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,
XXXXXXXXXX
Manager
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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