2023 Ruling 2023-0961681R3 - CEE Incurred by a Non-resident

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 non-resident deduct from its income earned in Canada the CEE to be incurred and renounced to it by virtue of the FTS it owns in another company resident in Canada? 2). Do the expenses planned to be incurred qualify as CEE? 3). Can the non-resident corporation validly renounce such CEE and CEE it directly incurs to its Canadian FTS investors?

Position: 1). Yes; 2). Yes; 3). Yes

Reasons: The law and a favourable opinion issued by Natural Resources Canada.

XXXXXXXXXX									2023-096168

XXXXXXXXXX, 2023

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request – Underground Mine
XXXXXXXXXX

We are writing in response to your request for an advance income tax ruling, dated XXXXXXXXXX on behalf of the above-noted Taxpayers. We also acknowledge the additional information provided in various email correspondence, as well as the information provided during telephone conversations.

We understand that to the best of your knowledge and that of the Taxpayers, none of the proposed transactions and/or issues involved in this ruling request are the same as or substantially similar to transactions or issues that are:

(a) in a previously filed tax return of the Taxpayers or a related person and;

(i) being considered by the Canada Revenue Agency in connection with any such tax return;

(ii) under objection by the Taxpayers or a related person;

(iii) the subject of a current or completed court process involving the Taxpayers or a related person; or

(b) the subject of a ruling request previously considered by the Income Tax Ruling Directorate in relation to the Taxpayers or a related person.

Unless otherwise stated:

1. all statutory references are to provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the “Act”) and all references to regulations are to the Income Tax Regulations, C.R.C., c. 945, as amended (the “Regulations”);

2. each term or expression mentioned in this letter and for which the Act (or the Regulations) provide a definition has the meaning given to it by that definition;

3. all amounts are in U.S. dollars;

4. words importing the singular number only include the plural and vice versa.

5. any references made within this letter to dollar values represent budgeted or estimated costs only and may not reflect the actual costs incurred per the books and records of the Taxpayers.

I. DEFINITIONS

“adjusted cost base” has the meaning assigned to that term by subsection 54(1);

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

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

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

“Company” means XXXXXXXXXX;

“Company’s Flow-through Shares” or “Company’s FTS” means the issued shares of the capital stock of the Company as described in Paragraph 76;

“Company B” means XXXXXXXXXX. and it is described in Paragraphs 9 to 11;

“Company C” means XXXXXXXXXX;

“Company D” means XXXXXXXXXX;

“Company E” means XXXXXXXXXX;

“CRA” means the Canada Revenue Agency;

“Deposit” means the mineral resource deposit located within the Property;

“Flow-through Shares” of “FTS” has the meaning assigned to that term by subsection 66(15);

“mass balance” means the process of accounting for all material that is mined, processed, and produced throughout the entire mining operation;

“Merger” has the meaning assigned in Paragraph 56;

“mineral resource” has the meaning assigned to that term by subsection 248(1) which includes a base or precious metal deposit;

“NPR” means Neutralizing Potential Ratio;

“paid-up capital” has the meaning assigned to that term in subsection 89(1);

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

“Project” means the exploration project as described in the Proposed Transactions and which is carried out on the Property;

“Property” means the property comprised of XXXXXXXXXX as described in Paragraphs 15 and 16;

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

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

“permitted footprint” means the area within which the Company is authorized for development and mining activities as outlined in its XXXXXXXXXX;

“XXXXXXXXXX Zone” means the near-mine expansion target located XXXXXXXXXX of the main resource areas;

“Second Study” means a pre-feasibility study as described in Paragraph 6;

“XXXXXXXXXX Zone” means the area that strikes roughly XXXXXXXXXX on the Property;

“Study” means the XXXXXXXXXX;

“taxable Canadian corporation” has the meaning assigned to that term by subsection 89(1);

“Taxpayers” means the Company and Company B;

“Third Study” means a feasibility study as described in Paragraph 6;

“XXXXXXXXXX” means the area located on the XXXXXXXXXX on the Property; and

“Treaty” means the Canada XXXXXXXXXX, as amended to the date of this letter.

II. BACKGROUND AND FACTS

Overview

1. The Company holds the Property which is located in XXXXXXXXXX. Various exploration and development activities occurred at the site over many years, leading to modest production of XXXXXXXXXX. However, due to a number of challenges, the mine never achieved anticipated production levels. Production ceased in XXXXXXXXXX, when mining and processing activities were suspended.

2. Since XXXXXXXXXX, the Company has continued to explore the Property and look for ways to restart the mine in an economic manner. The previous mill was de-commissioned during XXXXXXXXXX as the Company determined that the mill would not be able to perform in the intended manner to deliver an economic return. The capital cost of a new mill that could operate on the existing permitted footprint of the mine was determined to be uneconomic.

3. The Company completed the Study in XXXXXXXXXX which demonstrated a path to an economic return. The Study indicates the need for a much larger resource (requiring significant exploration investment) and the need for a larger physical footprint for the mill and related infrastructure which together will require a new environmental impact assessment.

4. The Property contains XXXXXXXXXX. It is anticipated that up to XXXXXXXXXX% of total revenue from the Property can be attributed to the sale of XXXXXXXXXX.

5. To support the Study, the Company intends to conduct extensive exploration on site from both the underground and from the surface over the next XXXXXXXXXX years to ensure there are significantly more resources to support the expected significant capital investment of a new mill and related infrastructure.

6. Later in XXXXXXXXXX, the Company intends to conduct a pre-feasibility study (the “Second Study”). The Second Study would take between XXXXXXXXXX to complete. If the Second Study continues to indicate a potential economic return, the Company would move to a feasibility study (the “Third Study”) and then ultimately a capital approval decision.

Company Information

7. The Company was formed on XXXXXXXXXX pursuant to the amalgamation of XXXXXXXXXX, Company C and Company D.

a. XXXXXXXXXX (“Company C”) is a wholly-owned subsidiary of XXXXXXXXXX. (“Company D”). Company C was the previous owner of the Property.

b. XXXXXXXXXX (“Company B”), through its direct and indirect wholly owned subsidiaries, acquired all of the issued securities of Company D via a plan of arrangement for approximately $XXXXXXXXXX in cash and shares of Company B on XXXXXXXXXX.

8. The Company is a taxable Canadian corporation and a principal-business corporation. The taxation year of the Company ends on XXXXXXXXXX. The head office is located at XXXXXXXXXX The Company is engaged in the exploration and development of XXXXXXXXXX.

9. Company B was incorporated as an XXXXXXXXXX corporation in XXXXXXXXXX under the name XXXXXXXXXX and on XXXXXXXXXX, changed its state of incorporation from the XXXXXXXXXX and changed its name to its current one. It is a non-resident of Canada and a principal-business corporation for the purposes of the Act. Its common shares are listed for trading on the XXXXXXXXXX. It is subject to tax in XXXXXXXXXX on its worldwide income and is a resident of XXXXXXXXXX for the purposes of, and is entitled to the benefits of, the Treaty.

10. The taxation year of Company B ends on XXXXXXXXXX. The head office is located at XXXXXXXXXX.

11. Company B is engaged in the business of acquisition, exploration and development of prospective XXXXXXXXXX. It also operates, directly and indirectly through its subsidiaries, XXXXXXXXXX.

12. Prior to the Merger, Company B, through Company E, was the XXXXXXXXXX% owner of the all the common shares of the Company. As a consequence of the Merger, Company B became and remains the XXXXXXXXXX% owner of all the common shares of the Company.

13. Prior to the Merger, Company E was a limited liability company formed under the laws of the XXXXXXXXXX. It was a non-resident of Canada for the purposes of the Act. All of the issued membership interests of Company E were owned directly by Company B.

14. Prior to the Merger, Company E owned all of the issued and outstanding shares of the Company. It owned no other material assets and had no material liabilities. The adjusted cost base of the outstanding shares of the Company is CAD $XXXXXXXXXX and the paid-up capital of the outstanding shares of the Company is CAD $XXXXXXXXXX.

The Property

15. The Property is located in XXXXXXXXXX, approximately XXXXXXXXXX. The nearest town is XXXXXXXXXX.

16. The Property contains XXXXXXXXXX.

The Deposit

17. The initial discovery of XXXXXXXXXX on the Property was made in XXXXXXXXXX.

18. From XXXXXXXXXX, ownership of the Property was held by various different companies which completed a series of surface and underground drilling activities.

19. Company C acquired the Property in XXXXXXXXXX and, under its stewardship, a series of activities were undertaken which lead to the first ore being extracted in XXXXXXXXXX.

Past Operations on the Property

20. Company B, through its direct and indirect wholly owned subsidiaries, acquired all of the shares of Company D in XXXXXXXXXX. At that time, the Property was under a cease mining restraint by the XXXXXXXXXX government due to potential XXXXXXXXXX contamination concerns in the mill. In late XXXXXXXXXX, the Company embarked on an investment of approximately $XXXXXXXXXX to expand the mill to XXXXXXXXXX tonnes per day along with other upgrades to existing surface infrastructure and underground development.

21. The mill and processing plant were commissioned in XXXXXXXXXX and the design capacity was anticipated to be able to process XXXXXXXXXX tonnes per day. The first ore was produced and flowed through the mill on XXXXXXXXXX. From XXXXXXXXXX, there was a total of XXXXXXXXXX days of production. However, the data shows that the mill never exceeded XXXXXXXXXX% of its capacity of XXXXXXXXXX tonnes of ore per day for more than XXXXXXXXXX consecutive days.

22. Minimal ore was produced from XXXXXXXXXX. In particular, during this time, the most ore processed by the mill in a single day was approximately XXXXXXXXXX tonnes on XXXXXXXXXX, only XXXXXXXXXX% of the mill’s daily capacity.

23. In XXXXXXXXXX, the Company restarted the milling operations on a more consistent basis and achieved average daily milling rates of approximately XXXXXXXXXX per day during XXXXXXXXXX, respectively, on days when the mill was operating. The average daily milling rates were approximately XXXXXXXXXX per day during XXXXXXXXXX for the entire month, taking into account the days the mill was not operational. The average daily mill rate for the months of XXXXXXXXXX was approximately XXXXXXXXXX per day representing XXXXXXXXXX% of the capacity of the mill.

24. On XXXXXXXXXX, the Company made the determination that the Property had reached commercial production for XXXXXXXXXX financial reporting purposes. The test applied to make this XXXXXXXXXX determination is different from the test employed by the CRA in determining whether a mine has “come into production in reasonable commercial quantities.”

25. XXXXXXXXXX focuses on when an asset is substantially complete and ready for its intended use and is in the condition necessary for it to be capable of operating in the manner intended.

26. Furthermore, the criteria to determine commercial production for XXXXXXXXXX financial reporting purposes requires the application of judgement and takes into account, but is not limited to, the following factors:

a. the achievement of continuous production or other output (typically when the processing facility is operating within XXXXXXXXXX% of its design capacity);

b. mineral recoveries at or near expected levels;

c. the plant is not being taken down on a routine basis to address start-up issues and fix problems; and

d. the commissioning team has been released.

Generally, no single factor is considered more important than the other and each factor must be considered in context with the facts and circumstances of the specific project.

27. Despite the fact that the mill and processing plant were operating only at an average daily mill rate of approximately XXXXXXXXXX per day for the months of XXXXXXXXXX, with this being only XXXXXXXXXX% of its capacity and below the XXXXXXXXXX% threshold described in paragraph 26(a), above, Company B declared commercial production on XXXXXXXXXX for XXXXXXXXXX financial reporting purposes. Company B made this decision on the basis that the Property had achieved production rates for milling and processing, that while not optimal, represented a sustainable level. Company B believed at that time that the mill and process plant would not require routine take downs to resolve issues that could be associated with commissioning of the mill and process plant.

28. Based on the fact that the Company had declared commercial production for XXXXXXXXXX purposes, the Company’s XXXXXXXXXX corporate tax returns were prepared on the basis that the Property had reached production in reasonable commercial quantities. Accordingly, any expenditures that would otherwise have qualified as CEE were not treated as CEE in the income tax returns because of the exclusion under subparagraph (vi) of the definition of CEE in paragraph 66.1(6)(f). However, exploration expenses incurred for regional or scout drilling (away from the existing ore body) were treated as CEE for income tax purposes. The Company has now determined that the Property should not be considered a mine that has come into production in reasonable commercial quantities.

29. Specifically, as of XXXXXXXXXX, budgeted production was forecast to reach approximately XXXXXXXXXX per day by the end of calendar XXXXXXXXXX and XXXXXXXXXX per day in early XXXXXXXXXX going forward in order to support a commercially viable operation. It was expected that the mill would be operating continuously post XXXXXXXXXX other than for planned maintenance (XXXXXXXXXX planned days annually).

30. Unfortunately, the mine never achieved budgeted production targets on a sustained basis. Actual production from XXXXXXXXXX was an average of XXXXXXXXXX/day in total and XXXXXXXXXX per day on the days the mill was in operation. Actual production from XXXXXXXXXX was an average of XXXXXXXXXX day in total and XXXXXXXXXX/day on the days the mill was in operation.

31. During the period XXXXXXXXXX, the actual throughput averaged XXXXXXXXXX% of the design capacity of the mill but despite this, at no time was the throughput over XXXXXXXXXX% for 90 consecutive days. In fact, the most consecutive days the mill was operating at XXXXXXXXXX% or above its design capacity from the time the mill began operating until the time the mine ceased operations was XXXXXXXXXX days in XXXXXXXXXX.

32. Post XXXXXXXXXX, there were a total of XXXXXXXXXX days where the mill was not operating at all, XXXXXXXXXX days of which were due to unplanned equipment issues and various other maintenance required due to the aging of the facility and equipment.

Operating Difficulties

33. The mine was unable to reach production targets on a sustained basis for multiple reasons including:

a. issues with the mill and processing plant facilities;

b. mass balance; and

c. water management issues

34. The original mill and processing plant facilities were purchased by Company C and relocated from a mine site in the XXXXXXXXXX to the Property site in XXXXXXXXXX. These facilities were operated for several years at their previous location in the XXXXXXXXXX and were constructed using old, dated components and equipment.

35. These facilities were fit to process XXXXXXXXXX deposits with a head grade different from head grade at the Property and assumed a different production rate than the Company’s. Company C made minimal modifications, replacing as little as possible of the old equipment and did not install a modern process control system for the operation. Essentially, the facilities were several decades old with minimal updates to bring them to the modern era. Ultimately this led to a mismatch of the process facilities’ design criteria and the ore body resulting in the inability to consistently process ore that simultaneously met planned throughput, recoveries and/or concentrate grade specifications. The mass balance was wrong and in particular, the XXXXXXXXXX circuit was undersized which resulted in XXXXXXXXXX ending up in the concentrate, lowering the XXXXXXXXXX concentrate grade, and then overloading that circuit which then overloaded the XXXXXXXXXX circuit with additional XXXXXXXXXX, which then negatively impacted the ability of the site to produce XXXXXXXXXX with an NPR less than XXXXXXXXXX.

36. Actual recoveries compared to planned recoveries were XXXXXXXXXX respectively. Delivery of concentrates at concentrate grades that met planned commercial terms during this time were XXXXXXXXXX compared to a planned amount of XXXXXXXXXX compared to a planned amount of XXXXXXXXXX%. As a result, the saleable XXXXXXXXXX concentrates were at the lower end of the minimum market specifications with several lots of poor-quality bulk concentrate that had to be sold below market value.

37. The significant age of the process equipment, lack of modern control systems, mismatch in design criteria and lack of experienced workforce combined together to cause significant maintenance issues that did not allow for consistent production rates and product that met required specifications from the facility. During the Company’s XXXXXXXXXX days of production, the mill operated for XXXXXXXXXX days and was only able to average an overall availability of XXXXXXXXXX% due to significant problems with the various flotation circuits, water management, chutes, regrind circuits, paste plant and many of other critical mill systems. These availability issues had a severe negative impact on throughput and operating costs.

38. Mass balance was also a significant issue given the fact that the site was unable to produce a consistent dry stack tailings product that met the permit standards for NPR of ? XXXXXXXXXX due to flawed design criteria and material flow sheet mass balance issues. The average NPR for the site was XXXXXXXXXX. Because of this mismatch, significant amounts of dry stack material that was unable to meet specifications were placed underground in mine workings, including several large waste stopes that had to be mined to provide storage space. Also, tied back to mass balance and water management issues with the mill, significant quantities of various concentrate residues (XXXXXXXXXX) ended up being flushed out to the main collection pond which ultimately required dredging and placement of that material underground. In addition, there was limited permitted waste (net acid generating, and potentially acid generating) stockpile volumes as well as a small XXXXXXXXXX stockpile that was at capacity before the Company took over operations, all of which negatively impacted the ability of the project to operate as planned.

39. Water management issues resulted from the water treatment plant design as it was designed more for exploration purposes rather than production purposes. As a result, the water treatment plant struggled to keep up with production.

40. The mismatch in design specifications and poor mass balance also impacted mine operations and water treatment operations, resulting in reduced productivities and increased operating costs.

41. During the XXXXXXXXXX through XXXXXXXXXX, the Company was unable to achieve sustained mill performance in order to support a commercially viable operation.

42. The Company generated $XXXXXXXXXX of negative operating cash flow in XXXXXXXXXX and a further $XXXXXXXXXX of negative operating cash flow in XXXXXXXXXX leading to the decision to cease mining operations during XXXXXXXXXX driven by the processing facility-related challenges as well as further deterioration in XXXXXXXXXX market conditions.

Current Status of the Mining Project

43. Mining and processing activities were suspended on XXXXXXXXXX and a majority of the workforce was laid off. A new management and technical team (compared to the team that was in place at the time the Property was initially acquired by Company B) have also been put in place and are responsible for the new Study and the exploration work being conducted at the Property.

44. The Company remains in good standing in relation to the existing exploration and operation permits.

45. The Company’s staff consists of XXXXXXXXXX the Property.

46. Maintenance activities are focused on maintaining proper infrastructure such as water treatment, administrative offices, maintenance and dry facilities, warehousing, and lodging.

Activities Completed from Cessation of Mining Operations to XXXXXXXXXX

47. After cessation of mining operations during XXXXXXXXXX, the Company embarked on an internal pre-feasibility study aimed to expand the mill capacity to approximately XXXXXXXXXX per day as experience clearly demonstrated XXXXXXXXXX per day did not result in production of reasonable commercial quantities nor an economically viable operation.

48. As part of the work completed in XXXXXXXXXX, a new flowsheet for the mill was developed. The Company incurred negative operating cash flow of $XXXXXXXXXX and spent $XXXXXXXXXX in capital expenditures during XXXXXXXXXX.

49. During XXXXXXXXXX, the Company completed comprehensive front-end engineering and design of the revised flowsheet and began to complete a comprehensive capital cost estimate while also continuing to explore. In anticipation of a positive outcome of the front-end engineering and design of the revised flowsheet, the Company undertook several early works activities at the existing processing plant including the de-commissioning of the old flowsheet equipment, including its removal and disposal from site. The Company ceased work on the internal pre-feasibility study in XXXXXXXXXX when the initial capital estimate for the XXXXXXXXXX per day expansion indicated a significantly higher capital estimate than originally envisioned. The Company incurred negative operating cash flow of $XXXXXXXXXX and spent $XXXXXXXXXX in capital expenditures during XXXXXXXXXX.

50. During XXXXXXXXXX, the Company began the Study to determine if there was an economically viable opportunity for the Project. The Study determined that there are several higher throughput tonnage scenarios which would require a significant increase in the amount of resource from the Deposit to be economically viable. Each of the higher throughput tonnage scenarios will require a new mining permit, triggering a full consultation process with all key stakeholders including the XXXXXXXXXX government and the local Indigenous communities. The Company incurred negative operating cash flow of $XXXXXXXXXX and spent $XXXXXXXXXX in capital expenditures during XXXXXXXXXX.

51. Surface exploration and underground mine exploration and development (solely to support the exploration work being carried out) has continued to be carried out since XXXXXXXXXX.

52. Approximately XXXXXXXXXX drilling (comprised of XXXXXXXXXX of underground and surface drilling respectively) was completed over the past XXXXXXXXXX years which has grown the overall resource significantly, increased confidence in the resource through infill drilling and defined several new mineralized trends.

XXXXXXXXXX

53. Much of the resource growth was generated from XXXXXXXXXX drilling completed from a new underground exploration ramp. The Company completed approximately XXXXXXXXXX of underground development from XXXXXXXXXX.

XXXXXXXXXX

54. The resource remains open in all directions and exploration efforts are focused on expanding the mineralized footprint to understand the scale of the Deposit along with detailed geological analysis and modelling to obtain sufficient information for future studies.

55. As previously stated, no near-term capital approval decision has been made or is possible without first conducting significant exploration to increase the size of the resource and performing necessary feasibility and environmental impact studies to support the larger anticipated mine footprint contemplated by the Study.

III. PRELIMINARY TRANSACTION

56. Prior to implementing the Proposed Transactions, in accordance with applicable foreign law, Company E merged with and into Company B such that Company B is the surviving entity (the “Merger”). On the Merger, Company E’s legal identity ceased to exist, and the shares of the Company became property of Company B.

IV. PROPOSED TRANSACTIONS

57. The Company is embarking on a multi-year exploration and evaluation program designed to expand the resource at the Property.

Exploration Programs

58. For XXXXXXXXXX, the Company intends to spend approximately $XXXXXXXXXX on exploration and supporting activities. If no exploration work were to be completed on the Property, the Company would incur expenditures of approximately $XXXXXXXXXX to maintain the Property primarily due to the on-going water treatment obligations.

59. As a result, the Company is forecasting to incur approximately $XXXXXXXXXX of expenditures for the purpose of conducting exploration work on the Property in XXXXXXXXXX. The total $XXXXXXXXXX of exploration expenditures is estimated to be split $XXXXXXXXXX related to underground drilling and development and the remaining $XXXXXXXXXX related to surface exploration.

60. In order to discover, delineate and then define resources and reserves, three types of drilling are undertaken:

a. Scout drilling is drilling that is performed over a new area, generally previously undrilled or with very limited drilling, with the purpose of determining the existence and location of an orebody. At the Property, this is usually conducted from XXXXXXXXXX. Drilling will usually be planned based on any of the following: mapping that shows favourable lithologies, structural setting and/or geochemical or geophysical anomalies. Drilling is usually broad spaced with optimal drill directions and spacing determined after drill success and interpretation of the mineralization intersected.

b. Expansion drilling is performed adjacent to a known orebody to determine the extent of the orebody. The aims are to follow the orebody along strike and down dip/plunge in order to locate the outside extents of the mineralized zone. It is usually performed on a more regular drill spacing than scout drilling XXXXXXXXXX. At the Property, this drilling is performed from XXXXXXXXXX.

c. Infill drilling is performed within the outside extents of an already known orebody in order to determine the quality of that orebody. Drill spacing is tighter than what is performed during expansion drilling XXXXXXXXXX. At the Property, this drilling is usually performed XXXXXXXXXX.

Underground Drilling (Expansion and Infill Drilling)

61. At XXXXXXXXXX of underground drilling (both infill and expansion) are proposed with the aims of (1) growing the quantity of inferred resources down dip and along strike and (2) infill drilling the resource to convert XXXXXXXXXX. Estimated costs for this program are approximately $XXXXXXXXXX.

62. The construction of XXXXXXXXXX of underground infrastructure, the purpose of which is to support the underground drilling exploration campaign noted above. It is not expected this infrastructure work will be of the appropriate size and specifications to facilitate access for potential future production activities. The Company will also incur additional indirect costs (XXXXXXXXXX) to support the exploration work being conducted. This includes but is not limited to maintaining the underground workings safe and dry by inspecting and repairing the underground ground support, developing metres of ramps, bringing certain infrastructure (power, communication, ventilation) to the areas where ramps are being developed and the drilling stations are located as well as maintaining pumping stations. Estimated costs for this program are approximately $XXXXXXXXXX.

Surface Drilling (Scout and Expansion Drilling)

63. At XXXXXXXXXX of expansion XXXXXXXXXX drilling are proposed with the aim of expanding the mineralized envelope at a broad drillhole XXXXXXXXXX.

64. At XXXXXXXXXX scout XXXXXXXXXX drilling with the aim of testing priority regional exploration targets, away from the current mineral resource.

65. Total estimated costs for the surface drilling programs are approximately $XXXXXXXXXX.

Additional Details of Exploration Work

66. In addition to the XXXXXXXXXX work described above the following will also be carried out at the Property:

a. Core logging – geological and geotechnical data collection from XXXXXXXXXX drill core. Sample collection of drill core for assay analysis of ore grade metals and trace metal geochemistry.

b. Geological modelling – interpretation of the data collected to a build a block model to estimate total size and grade of resource for mine planning, the primary purpose of which is to help focus drilling towards higher grades, new mineralized structures and additional resources. Application of data to build a geological model including lithologies, structure, mineralization and alteration to guide exploration and improve deposit understanding.

c. Resource modelling – taking the orebody knowledge and understanding of controls to mineralization gained during geological modelling and using these to build a block model. This will allow estimation of size and grade of resources.

d. Geological mapping and sampling of both the underground mine development and regional surface prospects.

e. Exploration program logistics, design and planning.

67. As part of the Company’s multi-year exploration and evaluation program, in XXXXXXXXXX, the Company is expecting to complete approximately XXXXXXXXXX of exploration drilling. However, forecasted exploration drilling for XXXXXXXXXX is expected to be a further XXXXXXXXXX metres per XXXXXXXXXX, showcasing the anticipated amount of exploration work that will be required in order to support an economically viable mine. The following table summarizes the forecasted exploration drilling program and the related costs to be incurred from XXXXXXXXXX (not including any underground development costs to support the exploration work being conducted and the related indirect support costs):

XXXXXXXXXX

Joint Venture

68. The Company’s only source of income is the Property.

69. Company B will acquire a XXXXXXXXXX% undivided interest in the Property from the Company for a cash purchase price equal to the fair market value of such undivided interest. The Company will include the proceeds of disposition in element “F” of the definition of cumulative CDE, and Company B will include its expenditure as a CDE pursuant to paragraph (e) of that definition.

70. The ownership of the undivided interest will allow Company B to enter into the Property and to perform exploration and development activities on its own.

71. Upon Company B acquiring the undivided interest in the Property, Company B and the Company will enter into a joint-venture agreement to jointly explore and develop the Property with the Company being the operator of the joint venture. As operator, the Company will continue to hold legal and registered title to the assets for the benefit of the Company and Company B in proportion to their specified percentage interests.

72. As the operator of the joint venture, the Company will conduct exploration activities at the Property, on its own behalf and as nominee on behalf of Company B. Each of the parties to the joint venture will directly bear its proportionate share of any expenditures incurred, including CEE and future development and operating expenditures.

73. The Company will distribute the cash received from Company B in paragraph 69 above, by a reduction of paid-up capital of the shares of its capital stock held by Company B. The amount of this distribution will not exceed the paid-up capital of the Company’s shares at that time.

74. Going forward, each party to the joint venture will fund directly the exploration work in accordance with their ownership percentage of the Property.

75. By carrying out the exploration activities described above, Company B will be carrying on business in Canada and will file the required income tax returns in Canada.

Flow-through Shares

76. The Company’s portion of the exploration expenditures will be financed by the Company issuing common shares to Company B. These common shares will qualify as FTS (the “Company’s FTS”).

77. To fund the exploration work, Company B is considering to raise capital by issuing shares to Canadian investors, which will qualify as FTS.

78. Company B intends to renounce to its FTS investors both the CEE arising from its direct expenditures as well as the CEE renounced to it by the Company through the Company’s FTS.

V. PURPOSE OF THE PROPOSED TRANSACTIONS

The Proposed Transactions are being undertaken for the purpose of the Company and Company B conducting an exploration and mineral resource evaluation program on the Property to determine the existence, location, extent and quality of XXXXXXXXXX on the Property.

The purpose for having Company B, rather than the Company, issue FTS to Canadian investors is that Company B’s shares are publicly listed on the XXXXXXXXXX and will be more attractive to investors than shares issued by the Company. However, it is expected that the FTS issued by Company B will be issued only to residents of Canada.

VI. RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, additional information, further representations 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. The Property is not a mine that has come into production in reasonable commercial quantities for the purposes of subparagraph (f)(vi) of the definition of CEE in subsection 66.1(6).

B. An expense incurred by the Company or Company B in respect of the exploration programs as described in the Proposed Transactions for the purpose of determining the existence, location, extent or quality of a mineral resource in the Deposit will qualify as CEE of the Company or Company B, as the case may be, pursuant to paragraph (f) of the definition of CEE in subsection 66.1(6) provided that such expense:

a. does not constitute the cost, or any part of the cost, to the Company or to Company B, as the case may be, of any depreciable property or Canadian resource property;

b. is not a CDE;

c. is not incurred before a new mine in the mineral 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

d. is not reasonably considered to be related to a mine in the Deposit that has come into production in reasonable commercial quantities or to be related to a potential or actual extension of that mine.

C. Provided that Company B is carrying on a business in Canada, subsection 66(12.71) will not apply to prevent Company B from renouncing CEE to an investor that acquired FTS from Company B.

D. Provided Company B and the Company continue to be related at all relevant times, paragraph 66(12.67)(a) will not apply to prevent Company B from renouncing, to a Canadian investor, CEE that was deemed to be incurred by Company B as a result of the renunciation of CEE by the Company to Company B in accordance with the Company’s FTS.

VII. COMMENTS

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).

Except as expressly stated, the rulings provided herein do not imply acceptance, approval or confirmation of any income tax implications of the Background and Facts, Preliminary Transaction or Proposed Transactions. In particular, nothing in this letter should be interpreted as confirming either expressly or implicitly:

a. the reasonableness of any expenditure;

b. any Canadian or foreign income tax consequences resulting from the Merger which is part of the Preliminary Transaction;

c. whether Company B will be carrying on business in Canada;

d. whether the Company or Company B, as the case may be, meets the definition of principal-business corporation;

e. except as specifically provided in Rulings A through D, whether any particular expense incurred by the Company or Company B, as the case may be, in respect of the exploration programs described in the Proposed Transactions will qualify as a CEE, or whether any particular expense not considered to be a CEE qualifies as a CDE;

f. whether any particular expense incurred by the Company, or Company B, as the case may be, that qualifies as a CEE or a CDE will be a Canadian exploration and development overhead expense as this term is described in paragraph 66(12.6)(b) and section 1206 of the Income Tax Regulations;

g. whether any shares or right issued as part of the Proposed Transactions qualifies as a FTS; and

h. the determination of the fair market value, adjusted cost base or the paid-up capital of any property referred to herein.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R12 dated April 1, 2022, and are binding on the CRA to the extent that the Proposed Transactions are implemented as described above by no later than XXXXXXXXXX. The above rulings are based on the law as it presently reads and they do not take into account any proposed amendments to the Act.

Although we received, for review, certain documents relating to the Proposed Transactions, our rulings are based solely on the facts and representations contained herein.

Yours truly,

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