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 that disposes of all or substantially all of its Canadian resource property in a transaction that is subject to the successor rules during a taxation year claim a deduction for CEE for that year? 2. A principal-business corporation can only claim CEE to the lesser of the amount incurred or income earned. Does income mean income from all sources or only income from resource activities?
Position: 1. Yes. 2. Income in this context means income from all sources.
Reasons: 1. Wording of legislation. 2. Wording of the legislation.
XXXXXXXXXX 2012-046251
L. Zannese
(613) 941-0782
December 12, 2012
Dear XXXXXXXXXX:
Re: CEE Claim in Year of Disposition of Canadian Resource Property
This is in response to your e-mail dated September 18, 2012, in which you requested our views in respect of the successor rules in section 66.7 of the Income Tax Act (the "Act") in relation to a principal-business corporation (as defined under subsection 66(15)).
Under paragraph 66.7(7)(e), where a person (the "Original Owner") disposes of all or substantially all of its Canadian resource property, as defined under subsection 66(15), to a corporation (the "Successor") and a joint election is filed, the resource expenditure pools of the Original Owner become subject to the successor rules in section 66.7. Your particular enquiry relates to the deduction of Canadian exploration expense ("CEE") that is available to a principal-business corporation (the "PBC") under subsection 66.1(2) in a situation where the PBC is an "Original Owner" that has disposed of all of its Canadian resource property to a Successor and a joint election has been filed under paragraph 66.7(7)(e).
OUR COMMENTS
The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. We are, however, prepared to offer the following general comments, which may be of assistance.
As you know, subsection 66.1(2) provides a deduction with respect to CEE incurred by a PBC. Under subsection 66.1(2), the PBC is entitled to deduct the lesser of the following two amounts:
- Under paragraph (a), the amount in its cumulative Canadian exploration expense ("CCEE") pool, as defined under subsection 66.1(6), at the end of the year plus the difference between the amount determined under subparagraph 66.7(12.1)(a)(i) and the amount of CEE to be included in its income pursuant to subsection 66.1(1), determined without considering the amount under subparagraph 66.7(12.1)(a)(i), and
- Under paragraph (b), the PBC's income for the year less any amounts deducted with respect to dividends pursuant to sections 112 and 113.
Subsection 66.7(12) provides rules to determine an Original Owner's resource expenditure pools after the disposition of resource properties to a Successor in circumstances where the successor rules apply. Under paragraph 66.7(12)(b), the CCEE balance of the Original Owner immediately after the disposition is reduced to nil. Subparagraph 66.7(12.1)(a)(i) refers to the amount by which the amount deducted under paragraph 66.7(12)(b) exceeds an amount designated under clause 66.7(12.1)(a)(i)(B). Under clause 66.7(12.1)(a)(i)(B), the Original Owner is permitted to designate all or part of its pre-succession CEE in favour of the Successor by filing a prescribed form within a prescribed time period.
With respect to your questions, our views are as follows. The PBC is entitled to claim a deduction under subsection 66.1(2) in the taxation year in which it disposes of all of its Canadian resource properties to a Successor. In a situation where the balance of the CCEE pool at the end of the taxation year is nil and the amount designated under clause 66.7(12.1)(a)(i)(B) is nil, the PBC's deduction limit under paragraph 66.1(2)(a) will be equal to the amount determined under paragraph 66.7(12)(b) i.e. the CCEE balance immediately after the disposition. Finally, it is our view that the term "income" under paragraph 66.1(2)(b) refers to the income of the PBC for the year as determined under section 3 of the Act.
We trust that our comments will be of assistance to you.
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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