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: 1. Can a corporation incur CEE/CDE for property it does not own? 2. Can this CEE/CDE be flowed out to its shareholders?
Position: 1. Depends 2. Maybe.
Reasons: 1. Would need to look at the legal arrangements. 2. Related persons can use “back-to-back renunciations”.
XXXXXXXXXX
2012-045534
L. Zannese
(613) 941-0782
August 9, 2012
Dear XXXXXXXXXX:
Re: Canadian exploration expenses and Canadian development expenses
This is in response to your email dated July 3, 2012, in which you requested our views with respect to the issuance of flow-through shares (“FTS”) in the following situation:
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A public corporation (“Parent”) owns 100% of the shares of a subsidiary (“Sub”);
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Sub owns Canadian resource property;
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Parent and Sub are principal-business corporations;
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Parent pays for certain Canadian exploration expenses (“CEE”) and Canadian development expenses (“CDE”) on behalf of Sub;
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Parent issues FTS to investors and enters into an agreement to incur qualifying CEE and CDE.
The terms “flow-through share”, “Canadian resource property” and “principal-business corporation” have the meanings assigned in subsection 66(15) of the Income Tax Act (the “Act”). The terms “Canadian exploration expense” and “Canadian development expense” are defined under subsections 66.1(6) and 66.2(5) respectively.
You enquire as to whether Parent can renounce the CEE and CDE to the holders of the FTS. You advise that many public corporations have utilized this structure to renounce qualifying expenses incurred by their subsidiaries. It is your view that as long as only one of the corporations, Parent or Sub, claims the CEE and CDE, there should not be a tax concern.
OUR COMMENTS
The final determination as to the appropriate classification of expenditures incurred by a taxpayer in a specific situation must be made with reference to all of the facts and circumstances relevant to that taxpayer's situation. We note that the definitions of CEE and CDE include expenses incurred by a taxpayer for the purpose of obtaining certain exploration objectives or for undertaking certain development activities. With respect to the above-described situation, we would need to analyze the legal agreements governing the transactions to determine, inter alia, which corporation incurred the CEE and CDE. Where Parent undertakes the exploration and development activities on behalf of Sub, it is conceivable that Parent is acting as agent for Sub. In such case, the expenses would be incurred by Sub, not Parent. Further, where Parent does not receive any consideration for undertaking Sub’s activities, we would consider the potential application of various benefit provisions contained in the Act.
Where a corporation has issued FTS and used the proceeds from the FTS to incur qualifying CEE and CDE, the corporation may renounce such expenses to the holders of the FTS pursuant to subsection 66(12.6) of the Act. We note that paragraph 66(12.67)(a) of the Act prevents a corporation from renouncing expenses that have been renounced to it by another corporation. However, this restriction does not apply to related corporations. In your particular situation, where Sub issues FTS to Parent and uses the proceeds to incur qualifying CEE and CDE, Sub may be entitled to renounce the expenses to Parent pursuant to subsection 66(12.6) of the Act. Parent would then be entitled to renounce the expenses to its FTS investors. We caution that, by virtue of paragraph 66(12.66)(d) of the Act, Sub cannot renounce CEE and CDE to Parent using the “look-back” rules under subsection 66(12.66) of the Act.
We trust that our comments will be of assistance.
Yours truly,
Fiona Harrison, C.A.
Manager
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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