2025 Ruling 2024-1019851R3 - CEE Ruling

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: Whether the expenses to be incurred in respect of the proposed Exploration Program will qualify as "Canadian exploration expenses" pursuant to paragraph 66.1(6)(f) of that definition.

Position: Yes, provided that all the facts and circumstances represented in this ruling are respected.

Reasons: The text of the law and the opinion of NRCan.

XXXXXXXXXX									2024-101985

XXXXXXXXXX, 2025

Re: Advance Income Tax Ruling Request – Whether certain expenses will qualify as “Canadian exploration expense”.

XXXXXXXXXX

Dear XXXXXXXXXX,

We are writing in response to your request for an advance income tax ruling (the “Ruling Request”) dated XXXXXXXXXX on behalf of the above-noted taxpayer (the “Taxpayer”). We also acknowledge the additional information provided in various email correspondence, as well as the information provided during the virtual meetings.

We understand that to the best of your knowledge and that of the Taxpayer, 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:

i. in a previously filed tax return of the Taxpayer or a related person and;

A. being considered by the Canada Revenue Agency (the “CRA”) in connection with such tax return;

B. under objection by the Taxpayer or a related person; or

C. the subject of a current or completed court process involving the Taxpayer or a related person; or

ii. the subject of a ruling request previously considered by the Income Tax Ruling Directorate in relation to the Taxpayer or a related person.

Unless otherwise stated:

i. all references to a statutory provision are to the relevant provision of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, (the “Act”), or, where appropriate, the Income Tax Regulations, C.R.C., c. 945, as amended, (the “Regulations”);

ii. all terms or conditions used in this letter that are defined in the Act (or in the Regulations) have the meaning given in such definition;

iii. all references to monetary amounts are in Canadian dollars; and

iv. the singular should be read as plural and vice versa where the circumstances so require.

I. DEFINITIONS

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to as follows:

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

XXXXXXXXXX;

“Company” means XXXXXXXXXX;

“Deposit” means the mineral resource deposit located within the Property (as defined below);

“Exploration Program” means the exploration and mineral evaluation program described in Paragraph 14;

“flow-through share” has the meaning assigned to that term by subsection 66(15);

“Mill” means the XXXXXXXXXX located on the Property;

“Mine” means the XXXXXXXXXX located on the Property;

“Mine Shaft” means the existing XXXXXXXXXX shaft at the Mine;

“mineral resource” has the meaning assigned to that term by subsection 248(1);

“MRE” means mineral resource estimate;

“New Zones” means Zone A and Zone B (as defined below);

“Paragraph” means a numbered paragraph in this letter;

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

“Property” means the property owned by the Subsidiary in XXXXXXXXXX;

“Proposed Transactions” means the transactions described in Paragraphs 13 through 19 below;

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

“Subsidiary” means XXXXXXXXXX;

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

“Zone A” means the XXXXXXXXXX exploration area which is located approximately XXXXXXXXXX of the Mine; and

“Zone B” means the XXXXXXXXXX exploration area which is located approximately XXXXXXXXXX of the Mine.

II. FACTS

Company Information

1. The Company was incorporated under the laws of XXXXXXXXXX and continued under the laws of XXXXXXXXXX. The Company is a:

a. taxable Canadian corporation;

b. public corporation; and

c. principal-business corporation.

2. The taxation year end of the Company is XXXXXXXXXX.

3. The head office of the Company is located XXXXXXXXXX.

4. The Company’s principal business is the exploration for and mining of mineral resources in Canada, primarily XXXXXXXXXX.

5. The Company acquired the Subsidiary on XXXXXXXXXX.

6. The Company owns all the issued and outstanding shares of the Subsidiary.

7. The Subsidiary was incorporated in XXXXXXXXXX and is governed by the laws of XXXXXXXXXX. The Subsidiary is a taxable Canadian corporation and a principal-business corporation.

8. The taxation year end of the Subsidiary is XXXXXXXXXX.

9. The head office of the Subsidiary is located XXXXXXXXXX.

10. The Subsidiary’s principal business is the exploration for and mining of mineral resources in Canada, primarily XXXXXXXXXX.

Information on the Property and the Mine

11. The Property is located XXXXXXXXXX.

12. The Deposit was discovered in XXXXXXXXXX and the Mine has reached production in reasonable commercial quantities during numerous periods since that time, including most recently in XXXXXXXXXX.

III. PROPOSED TRANSACTIONS

Exploration Activities in the New Zones

13. The Subsidiary is planning on performing exploration activities for XXXXXXXXXX in the New Zones. The New Zones have never been fully explored; accordingly, the geology is not understood at this stage and more information on the rock mass is required.

14. The Subsidiary plans to engage in extensive surface exploration activities to evaluate the geological structures in the New Zones (the “Exploration Program”) that would include:

a. Exploration drilling (resource expansion), infill drilling, metallurgical studies, geophysical surveying, mapping, rock/soil sampling, and trenching;

b. Environmental field studies and reports, including XXXXXXXXXX studies which are required by XXXXXXXXXX, as a condition for obtaining a right, license or privilege for the purpose of determining the existence, location, extent or quality of a mineral resource in the New Zones; and

c. Additional engineering studies, including geotechnical engineering and metallurgical testing (e.g., various studies to determine the mineralogy, comminution, XXXXXXXXXX, but not including metallurgical testing undertaken for determining an optimal method of ore separation.

15. The Exploration Program will not include any exploration activities undertaken within a XXXXXXXXXX surrounding the Mine.

16. The New Zones require a development separate from the Mine. None of the ore from any of the New Zones can be economically mined from the Mine.

17. If the decision is made to mine a New Zone, a separate decline (portal and ramp) will be developed to access the deposit. The Mine Shaft will not be used to access the New Zones.

18. All mining and development activities in the New Zones will be conducted using crews and equipment independent from the Mine.

19. The Subsidiary plans to use certain surface facilities connected with the Mine as support for the Exploration Program.

The existing surface facilities and equipment on the site of the Mine include

XXXXXXXXXX.

Of the above infrastructure, the shared facilities include

XXXXXXXXXX.

IV. ADDITIONAL INFORMATION

20. The Company is proposing to raise the necessary funds for the Exploration Program by issuing shares each of which is intended to qualify as a flow-through share for purposes of the Act.

21. Following the issuance of flow-through shares by the Company, the following transactions will be completed:

a. the Company will use the proceeds to subscribe for flow-through shares in the Subsidiary (“Subsidiary FTS Subscription”);

b. the Subsidiary will use the proceeds from the Subsidiary FTS Subscription to incur CEE;

c. the Subsidiary will renounce the CEE, described in b. above, to the Company; and

d. the Company will renounce the CEE, described in c. above, to subscribers of flow-through shares.

V. PURPOSE OF THE PROPOSED TRANSACTIONS

22. The Proposed Transactions in Paragraphs 13 through 19 are being undertaken for the purpose of conducting an exploration and mineral resource evaluation program in the New Zones in order to determine the existence, location, extent or quality of the mineral resource, specifically XXXXXXXXXX.

VI. RULING

Provided that the above statements of Facts, Proposed Transactions, Additional Information, and Purpose of the Proposed Transactions are accurate and constitute a complete disclosure of all relevant information and provided that the Proposed Transactions are completed in the manner described above, subject to our Comments below, our rulings are as follows:

A. An expense incurred by the Subsidiary, after the date of this letter, in respect of the Exploration Program in the New Zones described in the Proposed Transactions, will not be considered to be related to a potential or actual extension of the Mine 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 the Mine.

B. An expense incurred by the Subsidiary in respect of the Exploration Program as 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 Subsidiary pursuant to paragraph (f) of the definition of CEE in subsection 66.1(6) provided that such expense:

(a) is not a Canadian development expense,

(b) is not an expense in respect of the mineral resource 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,

(c) does not constitute the cost, or any part of the cost, to the Subsidiary of any depreciable property,

(d) meets the conditions of the Ruling A above so that such expense may not reasonably be considered to be related to the Mine or to be related to a potential or actual extension of the Mine.

V. 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 does not imply acceptance, approval, or confirmation of any income 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. any tax consequences relating to the Facts, the Proposed Transactions, or the Additional Information described herein other than those described in the rulings given above, including, for greater certainty, any tax consequences to any person other than the Subsidiary and the Company;

c. whether any particular expense incurred by the Subsidiary 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 “Canadian development expense” within the meaning of this term in subsection 66.2(5);

d. whether any particular expense incurred by the Subsidiary that qualifies as a CEE will be a Canadian exploration and development overhead expense as this term is described in paragraph 66(12.6)(b) of the Act and section 1206 of the Regulations;

e. whether the Company or the Subsidiary is a principal-business corporation;

f. whether any share in the capital stock of the Company or the Subsidiary is a flow-through share; and

g. the determination of the fair market value or adjusted cost base of any property referred to herein.

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R12 dated April 1, 2022, and is binding on the CRA provided that the Proposed Transactions are implemented as described above by no later than 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.

If the Facts, the Proposed Transactions, or the Additional Information as described above change after the date of this letter and prior to the completion of the Proposed Transactions, the rulings provided may not apply unless a subsequent ruling is issued.

Although we received, for review, certain documents relating to the Proposed Transactions, our ruling is 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