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: Will the expenses to be incurred by the taxpayer as part of the proposed exploration program qualify as CEE pursuant to paragraph (f) of that definition?
Position: Favourable ruling given provided that the proposed transactions are carried out as stated in the letter.
Reasons: Based on the opinion of NRCan, the expenses will not be considered to be related to a potential or actual extension of an existing mine that has come into production in reasonable commercial quantities.
XXXXXXXXXX 2018-075229
XXXXXXXXXX, 2018
Dear XXXXXXXXXX,
Re: Request for Advance Income Tax Ruling
XXXXXXXXXX – Business Number: XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX and your subsequent correspondence in which you requested an advance income tax ruling on behalf of the above-noted taxpayer (the “Company”).
To the best of the knowledge of the Company, none of the issues contained in this ruling request is:
(a) in a previously filed tax return of the Company or a related person;
(b) being considered by a tax services office or a tax centre in connection with a previously filed tax return of the Company or a related person;
(c) under objection by the Company or a related person;
(d) the subject of a current or completed court process involving the Company or a related person; or
(e) the subject of a ruling request previously considered by the Income Tax Rulings Directorate.
Unless otherwise noted, all statutory references herein are to the provisions of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, and all references to monetary amounts are in Canadian dollars.
I. DEFINITIONS
In this letter, the following terms or expressions have the meanings specified:
“AAA” means XXXXXXXXXX, the issuer of the NI 43-101 Technical Reports: XXXXXXXXXX Preliminary Economic Assessment (PEA) XXXXXXXXXX;
“Act” means the Income Tax Act R.S.C. 1985, c.1 (5th Supp.) as amended to the date of this letter, together with the regulations thereto;
“B Mine” means the XXXXXXXXXX which is a XXXXXXXXXX mine described in paragraph 3;
“Canadian development expense” or “CDE” has the meaning assigned to that terms by subsection 66.2(5) of the Act;
“Canadian exploration expense” or “CEE” has the meaning assigned to that term by subsection 66.1(6) of the Act;
“Canadian resource property” has the meaning assigned to that term by subsection 66(15) of the Act;
“Centre Pit” means the open pit mine in the Centre Zone;
“Centre Zone” means the mineralization areas located in XXXXXXXXXX of the Property;
“Company” means XXXXXXXXXX;
“CRA” means Canada Revenue Agency;
“Deposit” means the XXXXXXXXXX deposit located within the Property;
“East Pit” means the open pit mine in the Main Zone;
“g/t” means grams per tonne;
“Main Zone” means the mineralization zone located in XXXXXXXXXX of the Property;
“mineral resource” has the meaning assigned to that term by subsection 248(1) of the Act;
“Ministry” means the XXXXXXXXXX;
“New Zones” means the XXXXXXXXXX zones below the Open Pit Mines XXXXXXXXXX of the Property;
“Open Pit Mines” means collectively: (i) the East Pit in the Main Zone, (ii) the Centre Pit in the Centre Zone, and (iii) West Pit in the West Zone;
“PEA” means NI 43-101 Technical Report - Preliminary Economic Assessment XXXXXXXXXX;
“principal-business corporation” has the meaning assigned to that term by subsection 66(15) of the Act;
“Property” means the property located in the XXXXXXXXXX;
“public corporation” has the meaning assigned to that term by subsection 89(1) of the Act;
“related person” has the meaning assigned to that terms by subsection 251(2) of the Act;
“taxable Canadian corporation” has the meaning assigned to that term by subsection 89(1) of the Act;
“UTM” means Universal Transverse Mercator;
“West Pit” means the open pit mine in the West Zone; and
“West Zone” means the mineralization zone located in XXXXXXXXXX of the Property.
II. FACTS AND ASSUMPTIONS
1. The Company was incorporated under the XXXXXXXXXX. The Company’s common shares are listed for trading on the XXXXXXXXXX under the trading symbol “XXXXXXXXXX.”
2. The Company is a taxable Canadian corporation, a public corporation and a principal-business corporation. The taxation year of the Company ends on XXXXXXXXXX and its business number is XXXXXXXXXX. The principal place of business is located at XXXXXXXXXX. The Company is serviced by the XXXXXXXXXX Taxation Centre and the XXXXXXXXXX Tax Services Office of the CRA. The Company is engaged in the production and sale of XXXXXXXXXX, as well as the exploration and development of mining properties.
3. The Company has a XXXXXXXXXX% interest in the Property which it acquired on XXXXXXXXXX from an unrelated party, XXXXXXXXXX. The Company also owns and operates the B Mine and a XXXXXXXXXX which is located approximately XXXXXXXXXX of the Property. The B Mine reached commercial production in XXXXXXXXXX.
The Property
4. The Property is located in the XXXXXXXXXX which comprises mainly XXXXXXXXXX. The Property has three open pit mines which are currently under care and maintenance, namely:
a. the East Pit in Main Zone;
b. the Centre Pit in Centre Zone, which is XXXXXXXXXX of the Main Zone; and
c. the West Pit in the West Zone, which is approximately XXXXXXXXXX of the Main Zone.
The Open Pit Mines are shallow (XXXXXXXXXX) and are separated from one another by a distance of XXXXXXXXXX.
5. XXXXXXXXXX.
The Deposit
6. Up until around XXXXXXXXXX, the Deposit was mainly associated with three mineralized zones: the Main Zone, the Centre Zone and the West Zone. The XXXXXXXXXX mineralization is structurally controlled and is contained in a system of XXXXXXXXXX.
7. Previous production was obtained from the East Pit in the Main Zone, West Pit in the West Zone and the Centre Pit in the Centre Zone between XXXXXXXXXX.
8. Since XXXXXXXXXX, the Company has identified the New Zones which have high grade XXXXXXXXXX mineralization in XXXXXXXXXX zones below the Open Pit Mines XXXXXXXXXX of the Property.
9. The New Zones are in excess of XXXXXXXXXX.
Past Exploration and Mining Activities at the Open Pit Mines between XXXXXXXXXX
10. Since the acquisition of the Property in XXXXXXXXXX, the Company has completed a number of drilling programs in the Open Pit Mines area. The major exploration activities include a drilling campaign of XXXXXXXXXX in XXXXXXXXXX for a total of XXXXXXXXXX in the extension towards west of the Main Zone, as well as a drilling program of XXXXXXXXXX for a total of XXXXXXXXXX in certain sectors of the Main Zone. All drillings were at shallow depth of no more than XXXXXXXXXX.
11. Between XXXXXXXXXX, a bulk sample of XXXXXXXXXX was completed and a stage of pre-production commenced on the East Zone of the Property with the aim of evaluating certain mining parameters of the mineralized zones and the profitability of mining these zones according to the choice of mining methods.
12. XXXXXXXXXX.
13. Due to the lack of prospect of recovering ore at a reasonable commercial level, the management of the Company made a decision to shut down the mining operation at the Open Pit Mines in XXXXXXXXXX and the XXXXXXXXXX pits were put on care and maintenance. The Centre Pit in the Centre Zone was first shut down in XXXXXXXXXX and followed by the shutdown of East Pit in the Main Zone and the West Pit in the West Zone in XXXXXXXXXX. XXXXXXXXXX. The surface equipment and the XXXXXXXXXX lodging trailers were removed to reduce the camp into an exploration camp. In the following years, the Company maintained the road to access the site, and continues to maintain the remaining trailers in good order. No further reclamation work has been done. There was no further production from the Property since XXXXXXXXXX.
14. In XXXXXXXXXX, the Company completed a drilling campaign of XXXXXXXXXX diamond drill holes totalling XXXXXXXXXX in areas approximately XXXXXXXXXX distance from the Deposit in order to investigate some of the XXXXXXXXXX induced polarisation anomalies detected between XXXXXXXXXX. There were minimal exploration activities undertaken in XXXXXXXXXX.
XXXXXXXXXX Exploration Program – Surface Drilling / Open Pit Mining
15. On XXXXXXXXXX, the Company commenced a drilling program of XXXXXXXXXX with a total of XXXXXXXXXX holes on the Property. The focus of this drilling program was to test a new mineralization model and to provide an update of the mineral resource estimate made in XXXXXXXXXX. The updates included the identification of certain drilling targets, drilling supervision and validation drilling of high-grade zones with the study of the extensions of certain mineralized zones, for potential recommencement of open pit mining operations. The results were reported in the technical report issued by AAA on XXXXXXXXXX with an effective date of XXXXXXXXXX. AAA also recommended that the Company obtain a PEA that would target an open pit scenario with the mineralized material transported to the B Mine mill.
16. Following AAA’s recommendation in the XXXXXXXXXX technical report, the Company engaged AAA to prepare a PEA. A technical report for the PEA was issued by AAA on XXXXXXXXXX with an effective date of XXXXXXXXXX. Based on the PEA, AAA concluded that the mineral resource is economic and recommended to proceed with extensive diamond drilling aiming to convert inferred mineral resources into the indicated mineral resource category and to eventually complete a prefeasibility study for open pit mining. Additional sample diamond drilling was made, the results of which were announced on the XXXXXXXXXX showing that XXXXXXXXXX mineralization (i.e. XXXXXXXXXX) was intersected near the Open Pit Mines.
Exploration Programs in XXXXXXXXXX – Underground Drilling
17. Around XXXXXXXXXX, the exploration director of the Company who specialized in underground mining reviewed the previous drilling data information and proposed that XXXXXXXXXX mineralization might exist in the New Zones towards the south-east and south-west of the Open Pit Mines. The Company drilled XXXXXXXXXX, totalling XXXXXXXXXX, in the area towards the south-east and south-west of the Open Pit Mines. The drilling results confirmed the existence of higher grade mineralization XXXXXXXXXX east of the Open Pit Mines.
18. In the XXXXXXXXXX, ongoing surface drilling continued at the Deposit with the shift in focus to verifying the extension of several XXXXXXXXXX zones identified below and outside the Open Pit Mines and to eventually complete a prefeasibility study for underground mining. The exploration work confirmed the existence of several XXXXXXXXXX zones XXXXXXXXXX at depth of more than XXXXXXXXXX. Therefore, the objective of exploration was no longer for open pit mining as previously indicated in the XXXXXXXXXX PEA. Instead, exploration was being conducted at depths that could only reasonably be mined by creating an underground mining infrastructure and using underground mining methods.
19. On XXXXXXXXXX, the Company’s application to lease an area of public land at the XXXXXXXXXX, close to the facilities for the Open Pit Mines was approved. The purpose of the land is for constructing a larger permanent construction camp to accommodate an increased workforce allowing for the beginning of ramp excavation and construction to access underground for exploration of multiple shear zones below surface. The work began in XXXXXXXXXX and was completed in the XXXXXXXXXX to be ready for the bulk sample program in XXXXXXXXXX. The drill program continues XXXXXXXXXX at depth under the open pit areas with XXXXXXXXXX drills.
20. By the end of XXXXXXXXXX, the Company had completed XXXXXXXXXX of drilling in the New Zones. The exploration program has identified multiple XXXXXXXXXX zones below the XXXXXXXXXX pits; with a total drilled strike length of XXXXXXXXXX, as well as a depth of XXXXXXXXXX.
21. In preparation for underground drilling, the Company requested to amend the certificate of authorization for open pit mining at the Open Pit Mines site previously issued on XXXXXXXXXX by the Ministry to include underground drilling. The amendment was approved on XXXXXXXXXX and the Company is now permitted to perform both open pit and underground drilling at the Open Pit Mines and the New Zones site for extraction of XXXXXXXXXX not in excess of XXXXXXXXXX.
III. PROPOSED TRANSACTIONS
The following is a description of the exploration and evaluation program that will be performed in XXXXXXXXXX:
22. The goal of the Company’s XXXXXXXXXX drilling program is to continue with advancing the exploration by expanding the newly defined high grade New Zones below the Open Pit Mines and to proceed with an underground bulk sample program in XXXXXXXXXX, before completing a prefeasibility study for underground mining.
23. The bulk sample program will include developing a decline/ramp from XXXXXXXXXX below surface. Having a ramp starting in the bottom of the Open Pit Mines will save having to excavate an additional XXXXXXXXXX from surface since the bottom of the Open Pit Mines is already at XXXXXXXXXX below surface. The Company will drive underground drifts into the XXXXXXXXXX New Zones starting at around XXXXXXXXXX below surface. The plan is to send XXXXXXXXXX of ore to the B Mine mill later in the year to reconcile mill head grade with the mining grade in a defined sector.
24. The Company raised a portion of the funds for the above proposed exploration and evaluation work on the Property by issuing flow-through shares in XXXXXXXXXX, and it is considering raising additional funds by issuing additional flow-through shares.
V. PURPOSE OF THE PROPOSED TRANSACTIONS
The Proposed Transactions are being undertaken for the purpose of conducting an exploration and mineral resource evaluation program on the Property in order to determine the existence, location, extent and quality of XXXXXXXXXX at XXXXXXXXXX levels below the existing Open Pit Mines on the Property that would be expected to be mined by creating a new underground mining infrastructure and using underground mining methods.
VI. RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, additional information and purpose of the Proposed Transactions, and provided further that the Proposed Transactions are carried out as described above, subject to our Comments below our rulings are as follows:
A. An expense incurred by the Company, after the date of this letter, in respect of the exploration program in the New Zones described in the Proposed Transactions that will be undertaken at depths below the existing Open Pit Mines with a ramp starting at the bottom of the Open Pit Mines, will not be considered to be related to a potential or actual extension of the Open Pit Mines for the purposes of subparagraph (f)(vi) of the definition of CEE in subsection 66.1(6), provided that, if such exploration program culminates in the development of a mining operation, any such operation is conducted utilizing a new underground mine rather than an extension of any of the Open Pit Mines.
B. An expense incurred by the Company, after the date of this letter in respect of the exploration program in the New Zones described in the Proposed Transactions, for the purpose of determining the existence, location, extent or quality of a “mineral resource” in the New Zones will qualify as CEE of the Company pursuant to paragraph (f) of the definition of CEE in subsection 66.1(6) provided that such expense:
(i) does not constitute the cost, or any part of the cost, to the Company of any depreciable property or Canadian resource property;
(ii) is not a Canadian development expense;
(iii) is not an expense in respect of the mineral resource, incurred before a new underground mine in the New Zones comes into production in reasonable commercial quantities, that results in revenue or can reasonably be expected to result in revenue earned before the new underground 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
(iv) meets the conditions of Ruling A above so that such expense may not reasonably be considered to be related to the Open Pit Mines or to be related to a potential or actual extension of the Open Pit Mines.
Expenses incurred in order to determine the economic feasibility of whether or not to proceed with developing a new mine, or that are related to the processing or sale of a mineral do not, in our view, satisfy the purpose test in paragraph (f) of the definition of CEE in subsection 66.1(6) of the Act.
Further, in our view, expenses incurred as part of the exploration program carried out by the Company on the Property in XXXXXXXXXX and from XXXXXXXXXX, as described in paragraphs 15, 16 and 17 above, do not qualify as CEE since they relate to the Open Pit Mines.
Except as expressly stated, the rulings provided do not imply acceptance, approval or confirmation of any tax implications of the Facts, Proposed Transactions or Additional Information. In particular, nothing in this letter should be interpreted as confirming either expressly or implicitly:
(a) the reasonableness of any expenditure;
(b) whether any particular expense incurred by the Company in respect of the exploration program described in the Proposed Transactions above will qualify as a CEE, or whether any particular expense not considered to be a CEE qualifies as a CDE;
(c) whether any particular expense incurred by the Company that qualifies as a CEE or a CDE will be a Canadian exploration and development overhead expense as this term is described in in paragraph 66(12.6)(b) and section 1206 of the Income Tax Regulations;
(d) whether the Company is a principal-business corporation;
(e) whether any share in the capital stock of the Company which may be issued as envisioned in paragraph 24 above will be a flow-through share; and
(f) the determination of the fair market value or adjusted cost base of any property referred to herein.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R7 dated April 22, 2016, and are binding on the CRA provided that the Proposed Transactions are implemented by XXXXXXXXXX.
The above 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,
Acting Manager
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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