7 September 1989 Internal T.I. 58427 F - Canadian Exploration Expenses

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.

September 7, 1989

Dear Sirs:

Re:  Canadian Exploration Expenses

This is in reply to your letter of July 21, 1989 wherein you requested our interpretation of the types of expenses that are included in the definition of Canadian exploration expense (CEE) pursuant to subparagraph 66.1(6)(a)(iii) of the Income Tax Act (the "Act").  Your question is in relation to junior resource companies engaged solely in the business of mineral exploration.

You have offered two interpretations of CEE for our consideration:

1.     All expenses of the corporation are CEE along with those expenses which may be included in the definition of "Canadian exploration and development overhead expense" (CEDOE) pursuant to subsection 1206(1) of the Income Tax Regulation (the "Regulations").

2.     Expenses incurred directly on exploration activities are CEE with direct overhead expenses included in CEDOE.  All other overhead expenses are deductions subject to other applicable provisions of the Act - examples of such "other overhead expenses" which you suggested are share issue costs, audit fees, and general corporate administration costs.

Comments

Whether any particular expense will be included in the definition of CEE is a question of fact that can only be resolved by examining all of the relevant facts of the particular situation.  However, we offer the following general comments which may be of assistance to you.

Our view of your first interpretation of CEE is that it would only be accurate if all of the expenses being considered were incurred for the purposes outlined in subparagraph 66.1(6)(a)(iii).

Your second interpretation is more accurate as a general interpretation of CEE.  Direct exploration expenses would be classified as CEE pursuant to subparagraph 66.1(6)(A)(iii) provided they are incurred for the purposes outlined therein and are not excluded therefrom by virtue of clauses (E) or (F) thereof.  The direct overhead expense which are CEE would be classified as CEDOE pursuant to subsection 1206(1) of the Regulations to the extent they are made or incurred after 1980 and fall within the ambit of that provision.  Other expenses which are not CEE deductible only as provided for under other specific and general provisions of the Act.

The above comments are only expressions of opinion and as such should not be construed as advance income tax rulings, nor are they binding on the Department.

Yours truly,

ChiefResource Industries SectionBilingual Services & ResourceIndustries DivisionRulings Directorate