18 February 2010 External T.I. 2010-0357731E5 - Exploration expenses incurred by sole proprietor

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 the exploration expenses incurred by a sole proprietor would be Canadian exploration expense?

Position: Where the sole proprietor is a trader or dealer in rights to explore for minerals, the expenses would not qualify as Canadian exploration expense. The determination of whether a taxpayer is a trader or dealer is a factual one.

Reasons: The application of subsection 66(5).

									2010-035773
XXXXXXXXXX 								Fiona Harrison
(613) 957 2114
February 18, 2010

Dear XXXXXXXXXX :

Re: Exploration expenses incurred by Sole Proprietor

This is in reply to your letter of February 11, 2010, wherein you requested our comments regarding the tax consequences of certain exploration expenses incurred by a sole proprietor that carries out mining exploration activities.

Our Comments

The situation outlined in your letter appears to be a factual one, involving specific taxpayers. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular IC70-6R5, Advance Income Tax Rulings, dated May 17, 2002. However, we will offer the following general comments.

Subsection 66(5) of the Income Tax Act (the "Act") provides that the special rules with respect to resource expenditures contained in section 59 and section 66.1 of the Act do not apply in computing the income of a taxpayer (other than a "principal-business corporation" as defined under subsection 66(15)) where the business of the taxpayer includes trading or dealing in rights to explore for, drill for, or take minerals, petroleum, natural gas or related hydrocarbons. Whether any particular taxpayer is a trader or dealer of such rights is primarily a question of fact. Where subsection 66(5) of the Act is not applicable, the exploration expenses incurred by a taxpayer may qualify as "Canadian exploration expense" provided that they meet the requirements contained in the definition of that term under subsection 66.1(6) of the Act.

We trust our comments are of assistance.

Yours truly,

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