8 December 2015 External T.I. 2015-0616321E5 F - CEE - Severance pay

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66.1(6)

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

Principal Issues: 1. Whether a severance payment to an employee who performed services on exploration projects would be part of the Canadian exploration expenses of a taxpayer.

2. Whether a severance payment to an employee who performed services on exploration projects would be part of the Canadian exploration and development overhead expenses of a taxpayer.

Position: 1. No. 2. No.

Reasons: 1. Severance payment is an expense made at the cessation of employment and does not represent consideration for services provided. A connection cannot be made between the expenditure and the exploration and development work performed.
2. Severance payment is not a Canadian exploration expense or a Canadian development expense and therefore, the conditions of the definition of Canadian exploration and development overhead expense are not met.

XXXXXXXXXX
2015-061632
Sylvie Labarre, CPA, CA

December 8, 2015

Dear Sir,

Subject: Canadian Exploration Expense

This is in response to your email dated November 3, 2015 in which you requested our view on the subject mentioned above.

Unless otherwise stated, all statutory references herein are references to the provisions of the Income Tax Act.

You wish to know if a severance payment paid to an employee, whose duties were focused exclusively on exploration activities, would qualify as Canadian exploration expenses ("CEE") as defined in subsection 66.1(6).

You also wish to know whether a severance payment made by the taxpayer to an employee who performed services on exploration projects (but whose duties were not all or substantially all directed towards exploration or development activities) would constitute Canadian exploration and development overhead expenses ("CEDOE"), as defined in subsection 1206(1) of the Income Tax Regulations, on the basis of being a compensation (and related benefits) expense.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular (IC)70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Salary costs for time devoted by an employee to functions which are all directed on exploration activities in Canada described in the CEE definition in subsection 66.1(6) would be included as CEE. However, the CRA position is that a severance payment is an expense made by the corporation at the time of cessation of employment and does not constitute an amount paid for services rendered. Consequently, it is not possible to establish a link between the expense and the exploration work carried out. Thus, such a severance payment would not be included in CEE.

Only part of the salary costs respecting time spent by an employee, whose duties are not all or substantially all all focused on exploration activities described in the definition of CEE in subsection 66.1(6), would be part of CEE - namely, for the part relating to time such exploration. activities. For the same reasons as indicated in the previous paragraph, no part of the severance payment would be part of CEE.

A severance payment in respect of an employee whose duties were focused on development activities similarly would not be included in Canadian development expense ("CDE").

The preamble to the definition of CEDOE in subsection 1206(1) of the Income Tax Regulations (“Regulations”) indicates that CEDOE means CEE or CDE (other than as excluded in the preamble). Thus, where an employee’s time is not devoted at least 90% to eligible exploration activities in Canada, the portion of the wages, salary or other remuneration or related benefits which is eligible as CEE or CDE forms part of CEDOE, as defined in subsection 1206(1) of the Regulation. Consequently, as a severance payment is not included in CEE or CDE, it would also not be included in CEDOE by reason inter alia of the preamble to such definition.

We trust that our comments will be of assistance.

Stéphane Charette, CPA, CMA, MBA
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and
Regulatory Affairs Branch

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Text of Severed Letter

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.

Principales Questions: 1. Whether a severance payment to an employee who performed services on exploration projects would be part of the Canadian exploration expenses of a taxpayer. 2. Whether a severance payment to an employee who performed services on exploration projects would be part of the Canadian exploration and development overhead expenses of a taxpayer.

Position Adoptée: 1. No. 2. No.

Raisons: 1. Severance payment is an expense made at the cessation of employment and does not represent consideration for services provided. A connection cannot be made between the expenditure and the exploration and development work performed. 2. Severance payment is not a Canadian exploration expense or a Canadian development expense and therefore, the conditions of the definition of Canadian exploration and development overhead expense are not met.

XXXXXXXXXX 2015-061632 Sylvie Labarre, CPA, CA

Le 8 décembre 2015

Monsieur,

Objet : Frais d’exploration au Canada

La présente est en réponse à votre courrier électronique du 3 novembre 2015 dans lequel vous nous demandez notre opinion sur le sujet ci-dessus mentionné.

À moins d’indication contraire, tous les renvois législatifs dans la présente sont des renvois aux dispositions de la Loi de l’impôt sur le revenu.

Vous désirez savoir si une indemnité de départ payée à un employé dont toutes les fonctions étaient axées sur des activités d’exploration constituerait des frais d’exploration au Canada (« FEC »), tel que défini au paragraphe 66.1(6).

Vous désirez également savoir si une indemnité de départ payée à un employé dont les fonctions n’étaient pas toutes ou presque toutes axées sur des activités d’exploration ou d’aménagement constituerait des frais généraux d’exploration et d’aménagement au Canada (« FGEAC »), tel que défini au paragraphe 1206(1) du Règlement de l’impôt sur le revenu et ce, à titre de frais relatifs à la rémunération et avantages connexes.

Nos commentaires

La présente interprétation technique offre des commentaires généraux sur des dispositions contenues dans la loi et d’autres lois connexes, le cas échéant. Elle n’a pas comme but de confirmer le traitement fiscal relativement à une situation donnée mettant en cause un contribuable en particulier, mais plutôt de vous aider à le déterminer. Notre Direction ne confirme le traitement fiscal relatif aux opérations données d’un contribuable en particulier que dans le cadre d’une demande de décision anticipée en matière d’impôt sur le revenu présentée de la façon décrite dans la circulaire d’information IC 70-6R6, Décisions anticipées et interprétations techniques en matière d’impôt.

Les coûts salariaux relativement au temps consacré par un employé à l’égard de ses fonctions qui sont toutes axées sur des activités d’exploration au Canada décrites à la définition de FEC au paragraphe 66.1(6) seraient inclus à titre de FEC. Par contre, la position de l’ARC est qu’une indemnité de départ est une dépense faite par la société au moment de la cessation d’un emploi et ne représente pas une somme versée eu égard à des services rendus. Par conséquent, il n’est pas possible d’établir un lien entre la dépense et les travaux d’exploration exécutés. Ainsi, une telle indemnité de départ ne ferait pas partie des FEC.

Seulement une partie des coûts salariaux relativement au temps consacré par un employé dont les fonctions n’étaient pas toutes ou presque toutes axées sur des activités d’exploration décrites à la définition de FEC au paragraphe 66.1(6) ferait partie des FEC, soit la partie relative au temps consacré auxdites activités d’exploration. Pour les mêmes raisons que celles indiquées au paragraphe précédent, aucune partie de l’indemnité de départ ne ferait partie des FEC.

Une indemnité de départ à l’égard d’un employé dont les fonctions étaient axées sur des activités d’aménagement ne ferait pas partie non plus des frais d’aménagement au Canada (« FAC »).

Le préambule de la définition de FGEAC au paragraphe 1206(1) du Règlement de l’impôt sur le revenu (« Règlement ») nous indique que les FGEAC sont des FEC ou des FAC (autres que ceux exclus par ce préambule). Ainsi, lorsque l’employé ne se consacre pas à au moins 90 % de son temps à des travaux admissibles d’exploration au Canada, la partie du traitement, salaire ou autre rémunération ou avantages connexes qui serait admissible aux FEC ou aux FAC ferait partie des FGEAC, tel que défini au paragraphe 1206(1) du Règlement. Par conséquent, comme une indemnité de départ ne fait pas partie des FEC ni des FAC, elle ne ferait pas non plus partie des FGEAC en raison, entre autres, du préambule de cette définition.

Nous espérons que nos commentaires vous seront utiles.

Stéphane Charette, CPA, CMA, MBA pour le directeur Division des réorganisations Direction des décisions en impôt Direction générale de la politique législative et des affaires réglementaires

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (a)

severance payment not includible in CEE

Would a severance payment made by the taxpayer to an employee who performed services on exploration projects (but whose duties were not all or substantially all directed towards exploration or development activities) be part of the taxpayer’s Canadian exploration and development overhead expenses as per Reg. 1206(1)? Before finding that the payment would not so qualify, CRA stated (TaxInterpretations translation):

Salary costs for time devoted by an employee to functions which are all directed on exploration activities in Canada described in the CEE definition ... would be included as CEE. However, the CRA position is that a severance payment is an expense made by the corporation at the time of cessation of employment and does not constitute an amount paid for services rendered. Consequently, it is not possible to establish a link between the expense and the exploration work carried out. Thus, such a severance payment would not be included in CEE.

Summary Under

Tax Topics - Income Tax Regulations - Regulation 1206 - Subsection 1206(1) - Canadian exploration and development overhead expense

exclusion of severance payment

Salary costs for time devoted by an employee to functions which are all directed on exploration activities in Canada described in the CEE definition ... would be included as CEE. However, the CRA position is that a severance payment is an expense made by the corporation at the time of cessation of employment and does not constitute an amount paid for services rendered. Consequently, it is not possible to establish a link between the expense and the exploration work carried out. Thus, such a severance payment would not be included in CEE.

After noting that the same position applied to CDE, CRA stated:

The preamble to the definition of CEDOE ... indicates that CEDOE means CEE or CDE (other than as excluded in the preamble). Thus, where an employee’s time is not devoted at least 90% to eligible exploration activities in Canada, the portion of the wages, salary or other remuneration or related benefits which is eligible as CEE or CDE forms part of CEDOE... . Consequently, as a severance payment is not included in CEE or CDE, it would also not be included in CEDOE by reason inter alia of the preamble to such definition.

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8 December 2015 External T.I. 2015-0616321E5 F - CEE - Severance pay

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