2012 Ruling 2011-0422761R3 - Canadian Exploration Expenses

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 proposed surface exploration expenses that will be incurred more than 1.2 km from the existing mine shaft will qualify as CEE under section 66.1(6) of the Act.

Reasons: Based on the facts presented and a XXXXXXXXXX opinion prepared by Natural Resources Canada.

XXXXXXXXXX
									2011-042276

XXXXXXXXXX , 2012

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge the additional information you provided in your email of XXXXXXXXXX .

We understand that, to the best of your knowledge and that of the taxpayers named above, none of the issues involved in the ruling request are:

(i) involved 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 issued by the Income Tax Rulings Directorate involving the taxpayer or a related person.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

(a) “Act” means the Income Tax Act (Canada), RSC 1985, c.1 (5th Supp.), as amended to the date of this letter;

(b) “B Co.” means XXXXXXXXXX ;

(c) “Canadian development expense” or “CDE” has the meaning assigned to that term by subsection 66.2(5) of the Act;

(d) “Canadian exploration and development overhead expense” has the meaning assigned to that term by subsection 1206(1) of the Income Tax Regulations;

(e) “Canadian exploration expense” or “CEE” has the meaning assigned to that term by subsection 66.1(6) of the Act;

(f) “Canadian resource property” has the meaning assigned to that term by subsection 66(15) of the Act;

(g) “C Co.” means XXXXXXXXXX ;

(h) “C Co. Mine” means the XXXXXXXXXX ;

(i) “Company” means XXXXXXXXXX ;

(j) “CRA” means the Canada Revenue Agency;

(k) “flow-through share” has the meaning assigned to that term by subsection 66(15) of the Act;

(l) “mineral resource” has the meaning assigned to that term by subsection 248(1) of the Act;

(m) XXXXXXXXXX ;

(n) “Paragraph” refers to a numbered paragraph in this letter;

(o) “principal-business corporation” has the meaning assigned to that term by subsection 66(15) of the Act;

(p) “proposed transactions” means the transactions described in Paragraphs 11 through 17 below;

(q) “public corporation” has the meaning assigned to that term by subsection 89(1) of the Act; and

(r) “taxable Canadian corporation” has the meaning assigned to that term by subsection 89(1) of the Act.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

1. The Company is a public corporation in the business of resource exploration and development. The Company is a taxable Canadian corporation and is a resident of Canada for the purposes of the Act. The Company was incorporated under the XXXXXXXXXX with a taxation year end of XXXXXXXXXX and its head office is located at XXXXXXXXXX . The Company files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office. The Company will be a principal-business corporation at the time it issues flow-through shares.

2. The Company’s authorized share capital consists of an unlimited number of preferred shares, issued in series, and an unlimited number of common shares without par value. The Company’s common shares are listed on the XXXXXXXXXX .

3. On XXXXXXXXXX , the Company acquired all of the issued and outstanding shares of B Co. (the “B Co. Acquisition”).

4. B Co. is a taxable Canadian corporation and principal-business corporation existing under the laws of XXXXXXXXXX . The head office is located at XXXXXXXXXX . B Co. is a resident of Canada for the purposes of the Act and files its corporate income tax returns at theXXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

5. Contemporaneous with the B Co. Acquisition, B Co. acquired all of the issued and outstanding common shares of C Co.

6. C Co. is a taxable Canadian corporation and principal-business corporation existing under the laws of XXXXXXXXXX . The head office is located at XXXXXXXXXX . C Co. is a resident of Canada for the purposes of the Act and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

7. The acquired assets of C Co. consisted of property and the C Co. Mine located in XXXXXXXXXX , Canada, including XXXXXXXXXX

8. The Former Mine is located XXXXXXXXXX .

9. The Former Mine was an operational underground XXXXXXXXXX mine from XXXXXXXXXX and underwent a temporary suspension of activities between XXXXXXXXXX , and again between XXXXXXXXXX . The Former Mine resumed production of reasonable commercial quantities of XXXXXXXXXX resources in XXXXXXXXXX and then ceased production in early XXXXXXXXXX leading to a full shutdown in early XXXXXXXXXX . XXXXXXXXXX .

10. The surface facilities at the Former Mine consist of XXXXXXXXXX .

PROPOSED TRANSACTIONS

11. The Company has identified several prospective geological formations located near the Former Mine (the “New Zones”). The specific occurrences are identified as XXXXXXXXXX . The New Zones are located between XXXXXXXXXX from the Former Mine. The New Zones have never been fully explored; accordingly, the geology is not understood at this stage and more information on the rock mass is required.

12. C Co. plans to engage in an extensive surface exploration program to evaluate the geological structures in the New Zones (the “Exploration Program”). The Exploration Program will not include any exploration activities undertaken within a XXXXXXXXXX perimeter surrounding the Former Mine shaft. Any exploration activity that will result in the development of a new open pit mine will be part of the Exploration Program. However, any exploration activity that relates to the Existing Open Pit Mine will be excluded from the Exploration Program. Further, any exploration activity that will be incurred from the underground workings of the Former Mine will be excluded from the Exploration Program.

13. The basis of the Exploration Program is to explore the potential for these targets, to host potential open pit deposits and, if suitable quantities of ore are delineated, to ultimately exploit these deposits.

14. The Exploration Program will include XXXXXXXXXX . If the results of this program are deemed successful, one or more follow up programs will be undertaken.

15. The Exploration Program does not include any plan to explore any unexplored areas of the Former Mine or the deposit at the Former Mine, including locations below the previous known deposit.

16. Currently, neither the Company nor its subsidiaries have the intention of drilling or further developing the known resource accessed by the Former Mine. The Former Mine was exclusively exploited by underground methods from a single continuous horizon to a depth of XXXXXXXXXX from the surface.

17. C Co. plans to use certain surface facilities connected with the Former Mine as support for the Exploration Program, such as XXXXXXXXXX , however, the surface facilities will not be an integrated part of the Exploration Program.

OTHER INFORMATION

18. The Company has not yet determined the development phase, if any, of the New Zones. In the event that the Company decides to develop the New Zones by open pit mining methods, as opposed to the historic underground methods, a new and distinct fleet of equipment and personnel would be required. If the Company decides to develop the New Zones by underground methods, new workings, XXXXXXXXXX would have to be constructed.

19. On XXXXXXXXXX , the Company closed a private placement of flow-through shares for an aggregate gross proceeds of $XXXXXXXXXX (the “Private Placement”). The Company renounced CEE XXXXXXXXXX with an effective date of renunciation of XXXXXXXXXX in accordance with the provisions of subsections 66(12.6) and 66(12.66) of the Act.

20. The Company will not directly incur the CEE. As noted in Paragraph 12, C Co. will carry out the Exploration Program and will therefore incur the CEE.

21. Following the Private Placement, the following transactions have been, or will all be, completed:

(i) the Company used the proceeds of the Private Placement to subscribe for flow-through shares in B Co. (the “B Co. Private Placement”);

(ii) B Co. used the proceeds from the BCo. Private Placement to subscribe for flow-through shares in C Co. (the “C Co. Private Placement”);

(iii) C Co. will use the proceeds from the C Co. Private Placement to incur CEE;

(iv) C Co. will renounce the CEE, described in (iii) above, to B Co.; and

(v) B Co. will renounce the CEE, described in (iv) above, to the Company.

PURPOSE OF THE PROPOSED TRANSACTIONS

22. The purpose of the Exploration Program is to determine the existence, extent and quality of mineral resources in the New Zones and not to increase the known resource at the Former Mine. The Former Mine has been on care and maintenance since XXXXXXXXXX and the New Zones are separate and distinct from the historical mineral reserve and have no structural connection to the Former Mine.

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:

We confirm that, subject to our Comments below, an expense incurred by C Co. in respect of the proposed Exploration Program, which is incurred for the purpose of determining the existence, location, extent or quality of a mineral resource on the New Zones including any expense incurred in the course of:

(i) prospecting,

(ii) carrying out geological, geophysical or geochemical surveys,

(iii) drilling by rotary, diamond, percussion or other methods, or

(iv) trenching, digging test pits and preliminary sampling,

but not including:

(v) any Canadian development expense,

(vi) any expense described above in (i), (iii) or (iv) in respect of the mineral resource, incurred before a new mine in the XXXXXXXXXX resource comes into production in reasonable commercial quantities, 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, and

(vii) any expense that may reasonably be considered to be related to a mine in the XXXXXXXXXX l resource that has come into production in reasonable commercial quantities or to be related to a potential or actual extension of the mine, including any expense that may reasonably be considered to be related to the Former Mine or the Existing Open Pit Mine,

will qualify as a Canadian exploration expense pursuant to paragraph (f) of the definition thereof in subsection 66.1(6) of the Act, provided that:

(a) the expense does not constitute the cost, or any part of the cost, to C Co. of any depreciable property; and

(b) the expense is incurred before a mine comes into production in reasonable commercial quantities in respect of any XXXXXXXXXX that may be found on the New Zones pursuant to the proposed Exploration Program.

COMMENTS

1. Any surface exploration expenses incurred for activities undertaken in the area that is less than XXXXXXXXXX from the Former Mine will not qualify as CEE under section 66.1(6) of the Act.

2. CEE is deemed to have been incurred by the Company on the effective date of the renunciation pursuant to paragraph 66(12.61)(a) of the Act as a result of a renunciation under subsections 66(12.6) and 66(12.66) of the Act, only where it can be established that:

(i) at the time of the renunciation by C Co. to B Co., and B Co. to the Company, C Co. is related to B Co., and C Co. is related to the Company, for purposes of the Act;

(ii) the effective date of the renunciation by C Co. to B Co. and B Co. to the Company is in the XXXXXXXXXX calendar year;

(iii) the CEE so renounced by C Co. to B Co. and B Co. to the Company is incurred by C Co. and B Co., as the case may be, before the effective date of the renunciation by C Co. to B Co. and B Co. to the Company, as the case may be; and

(iv) the CEE is of the type referred to in paragraph 66(12.66)(b) of the Act before it is renounced by C Co. and B Co.

3. Part XII.6 of the Act may be applicable with respect to any CEE that has been renounced under subsection 66(12.6) because of the application of subsection 66(12.66) of the Act.

4. Nothing in this ruling should be construed as implying that the CRA has reviewed, accepted or has made any determination in respect of:

(i) the fair market value or adjusted cost base of any particular asset, or the paid-up capital in respect of any shares referred to herein;

(ii) whether the Company, B Co. or C Co. meet the definition of a principal-business corporation or whether any share issued by the Company, B Co. or C Co., as contemplated in Paragraphs 19 to 21 above will be a flow-though share;

(iii) whether any particular expense incurred by the Company, B Co. or C Co. in respect of the Exploration Program, will qualify as CEE, or whether any particular expense not considered to be CEE will qualify as CDE;

(iv) whether any particular expense incurred by the Company, B Co. or C Co. will constitute a prescribed Canadian exploration and development overhead expense for the purpose of paragraph 66(12.6)(b) of the Act; and

(v) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the CRA provided that the Company, B Co. and C Co. have commenced implementing the proposed transactions by XXXXXXXXXX .

This ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.

Yours truly,

XXXXXXXXXX
Manager
Resources Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch