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 expenses relating to a proposed exploration program will qualify as Canadian exploration expenses under paragraph (f) of the CEE definition, and will not be considered to be related to a mine that has come into production in reasonable commercial quantities or to a potential or actual extension thereof.
Position: The mine will be considered to be a new mine and not a mine that has come into production in commercial quantities or an extension thereto. No position taken with respect to expenses incurred.
Reasons: Based upon the facts and a written opinion from Natural Resources Canada.
XXXXXXXXXX
2010-036248
XXXXXXXXXX, 2013
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to the letters dated XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayers.
We understand that, to the best of your knowledge and that of the taxpayers, none of the issues involved in the ruling is:
(i) in an earlier return of the taxpayers 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 taxpayers or a related person,
(iii) under objection by the taxpayers or a related person,
(iv) before the courts, or
(v) the subject of a ruling previously considered by the Directorate involving the taxpayers or a related person.
DEFINITIONS
In this letter, the following terms have the meanings specified:
"Act" means the Income Tax Act (Canada), as amended to the date of this letter;
"Canadian exploration expense" ("CEE") has the meaning assigned to that term by subsection 66.1(6) of the Act;
"Canadian development expense" ("CDE") has the meaning assigned to that term by subsection 66.2(5) of the Act;
"Corporation A" means XXXXXXXXXX;
"Corporation B" means XXXXXXXXXX;
"Corporation C" 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;
"principal-business corporation" has the meaning assigned to that term by subsection 66(15) of the Act;
"Property" means the XXXXXXXXXX mine as described in paragraph 3 below;
"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 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. Corporation A was incorporated in XXXXXXXXXX under the Companies Act of XXXXXXXXXX. Corporation A was an unlisted reporting issuer and subsidiary of XXXXXXXXXX until XXXXXXXXXX when XXXXXXXXXX sold its interest in Corporation A to XXXXXXXXXX. Corporation A completed an initial public offering in XXXXXXXXXX and became a public corporation trading on the XXXXXXXXXX. Corporation A qualified as a principal-business corporation.
2. Corporation B was incorporated in XXXXXXXXXX. Its head office is located at XXXXXXXXXX. Corporation B is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre. Its business number is XXXXXXXXXX. Corporation B is a principal-business corporation as its principal business is XXXXXXXXXX in Canada.
3. The Property is located in the XXXXXXXXXX. The Property lies with XXXXXXXXXX. The Property, comprising XXXXXXXXXX claim group number XXXXXXXXXX, is approximately XXXXXXXXXX hectares in area and consists of XXXXXXXXXX mineral claims.
4. Records of exploration on the Property date from XXXXXXXXXX; work included trenching, XXXXXXXXXX drilling and compiling small test batches by XXXXXXXXXX.
5. Commencing in XXXXXXXXXX and finishing in XXXXXXXXXX, Corporation C carried out XXXXXXXXXX. From XXXXXXXXXX to XXXXXXXXXX, Corporation C, together with another corporation operated a joint venture which carried out XXXXXXXXXX programs totaling XXXXXXXXXX meters. When the programs concluded, Corporation C reported a XXXXXXXXXX reserve of XXXXXXXXXX metric tonnes XXXXXXXXXX. In addition, road and underground access became available in XXXXXXXXXX; at the same time construction began on the XXXXXXXXXX.
6. Mine production commenced in XXXXXXXXXX of XXXXXXXXXX. The capital costs reported for this project were $XXXXXXXXXX Canadian funds.
7. The mine complex operated until XXXXXXXXXX when operations ceased due to unfavourable economics including the XXXXXXXXXX. During the period the mine was operating it produced approximately XXXXXXXXXX metric tonnes of XXXXXXXXXX.
8. Corporation C put the mine on care and maintenance in XXXXXXXXXX. The mine remained on care and maintenance until XXXXXXXXXX when it was stripped of the underground services and was allowed to flood.
9. Between XXXXXXXXXX and XXXXXXXXXX, Corporation C completed a number of XXXXXXXXXX. In addition, Corporation C completed a total of XXXXXXXXXX.
10. Corporation C sold the Property to Corporation B in XXXXXXXXXX. From XXXXXXXXXX to XXXXXXXXXX Corporation B undertook XXXXXXXXXX. In XXXXXXXXXX, a XXXXXXXXXX hold surface diamond drill program commenced involving XXXXXXXXXX meters to confirm and expand the data on the XXXXXXXXXX identified by Corporation C. In XXXXXXXXXX, Corporation B obtained permission to dewater the mine and drill from underground. This work was terminated shortly after it started. From XXXXXXXXXX to XXXXXXXXXX Corporation B engaged in an XXXXXXXXXX-hole surface diamond drill program to further expand the program commenced in XXXXXXXXXX and to test the tailing pond zone located approximately XXXXXXXXXX of the mine workings. Corporation B did not re-open the mine on the Property.
11. On XXXXXXXXXX, Corporation A announced that it had entered into a letter of agreement to acquire the Property from Corporation B. Corporation A acquired the Property on XXXXXXXXXX and issued its shares as consideration for the Property.
12. The Property contains the old mine workings, a XXXXXXXXXX tonne per day mill XXXXXXXXXX and mine operating infrastructure. An environmental permit was issued to discharge mine tailing into the environment which must be updated in order to comply with current environmental standards.
13. In XXXXXXXXXX, Corporation A performed an exploration program of airborne geophysical surveys, geological mapping, channel sampling of trenches and surface outcrops, and diamond drilling from surface.
PROPOSED TRANSACTIONS
14. The required work has begun to upgrade the existing historical resources of the Property to be NI 43-101 compliant. This is a two-stage process (the "Proposed Program"). During stage one, the resource is upgraded so that it has compliant resource status through a process of undertaking twinning drill holes that will penetrate the resource, so that the integrity of previous drill hole core records can be verified by re-logging, sampling and analyzing the historical core, and carrying out a resource recalculation. The second stage involves demonstrating that the mining method specified will be applicable through a process of test mining or other vetting processes. This will require de-watering the mine.
15. Permission will be requested from XXXXXXXXXX to dewater the mine for the purpose of initially conducting a XXXXXXXXXX metre diamond drill program in order to expand the present resource/reserve base.
16. Concurrently with the diamond drill program, there will be undertaken mining activities that will mine a XXXXXXXXXX metric tonne bulk ore sample to evaluate alternative mining and sampling methodologies. The sample will be transported to the surface for test milling. The existing concentrator will be reassembled, repaired and reconfigured to process the bulk sample using a XXXXXXXXXX process to ascertain XXXXXXXXXX.
If acceptable results are achieved from the above described proposed transactions, then the necessary equipment and supplies will be acquired and the modifications will begin to the infrastructure (old mine workings, and the mill) in order to establish and support continuous mining/milling operations on the Property.
17. New mine status has been granted to the Property by the Province of XXXXXXXXXX.
18. On XXXXXXXXXX Corporation A and Corporation B completed an agreement under which Corporation B acquired the remaining shares of Corporation A. As a result, Corporation A became a subsidiary of Corporation B. Further, as part of this agreement a new corporation was incorporated and the Property was transferred to the new corporation.
19. As a result of Corporation B acquiring Corporation A, Corporation B will be responsible for the obligations resulting from any flow-through share agreements entered into by Corporation A.
PURPOSE OF THE PROPOSED TRANSACTIONS
20. The purpose of the proposed transactions is to attract the necessary financing required to develop the Property.
RULING
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, subject to the Opinion provided below, we confirm the following
A. The Property will not be a mine that has come into production in reasonable commercial quantities for the purpose of subparagraph (f)(vi) of the definition "Canadian exploration expense" under subsection 66.1(6) of the Act.
Except as expressly stated, the 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:
(a) the reasonableness of any expenditure referred to in this letter;
(b) the determination of the fair market value or adjusted cost base of any property referred to herein;
(c) whether any particular expense incurred qualifies as CEE or CDE;
(d) whether Corporation A and Corporation B are principal-business corporations;
and
(e) whether the shares of the capital stock of Corporation A and Corporation B are flow-through shares.
The above advance income tax ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
OPINION
Provided that paragraph (g) of the definition "Canadian exploration expense" in subsection 66.1(6) of the Act is enacted in substantially the same form as proposed in the Notice of Ways and Means Motion to introduce an Act to amend the Income Tax Act released by the Minister of Finance on March 21, 2013, any expense incurred under the Proposed Program for the purpose of bringing a new mine in a mineral resource in Canada into production in reasonable commercial quantities and incurred before the new mine comes into production in such quantities may not qualify as Canadian exploration expense.
In accordance with paragraph 22 of Information Circular 70-6R5 the comments in the immediately preceding paragraph are only an expression of an opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the Canada Revenue Agency.
Yours truly,
XXXXXXXXXX
Manager
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
c.c. XXXXXXXXXX
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