12 February 1991 Internal T.I. 9100437 F - Cumulative 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.

Your memorandum of December 10, 1990 requests a technical interpretation of the above-captioned provisions in relation to a hypothetical situation described herein.

HYPOTHETICAL SITUATION

Your hypothetical situation involves the following:

1.     On November 30, 1987, Company S sold all of its Canadian resource properties to Company E under circumstances whereby the successor rules in section 66.7 of the Act apply.

2.     Company S's cumulative Canadian exploration expense ("CCEE") at the time of disposition was $30 million.

3.     Company S's taxable income for its taxation year ended October 31, 1988 was $100 million, solely by virtue of the negative cumulative Canadian development expense ("CCDE") balance resulting from the sale of the resource properties to Company E.

4.     Company S did not claim any deduction in respect of its CCEE of $30 million in computing its taxable income of $100 million.  The CCEE was transferred to Company E which deducted the successored CCEE under the successor rules contained in section 66.7 of the Act.

5.     Company S was in receivership and all of the proceeds of disposition of resource properties were paid to its primary secured creditor.  Consequently, Company S could not settle its 1988 tax liability.

6.     Company S and Company E are both principal business corporations dealing with each other at arm's length.

YOUR ANALYSIS AND OUR COMMENTS

A. Current Rules

You briefly state that:

1.   Company S is required under paragraph 66.1(2) (a) to claim the lesser of its CCEE of $30 million and its income for the year of $100 million, i.e., Company S is required to deduct the CCEE of $30 million in its 1988 taxation year.

2.   Company S is required to reduce its CCEE, which will be transferred to Company E, by the amount of the CCEE of $30 million which exceeds its subsection 66.1(2) claim of $30 million.  The amount determined under paragraph 66.7(12)(b) would therefore be nil.

3.   Under subparagraph 66.7(3)(a)(iii), the amount of Company S's CCEE ($30 million) which may be deducted by Company E would be reduced by the amount which was deductible by Company S ($30 million) under subsection 66.1(2). Company E's deduction, which would be computed under subsection 66.7(3), in respect of Company S's CCEE would therefore be nil.

Our Comments to A

We share your interpretation of the above provisions and we agree with your conclusions that Company S, not Company E, would be required to deduct the CCEE of $30 million in computing Company S's taxable income for the taxation year ended October 31, 1988.

B.   July, 1990 Proposed Legislation

You briefly state that:

1.        Under proposed 66.7(12)(b), in computing its CCEE at any time after November 30, 1987, Company S would be required to deduct "the amount thereof determined immediately after the disposition".  Company S's CCEE at its October 31, 1988 year-end would therefore be nil.

2.     The amount of CCEE which Company S would be required to deduct at October 31, 1988 under paragraph 66.1(2)(a) would be nil because its CCEE under subparagraph 66.1(2)(a)(i) would be nil.

3.     Under proposed paragraph 66.1(2)(b), Company S may deduct its CCEE to the extent of the amount determined under proposed subparagraph 66.7(12.1)(a)(i).  This subparagraph refers to the amount which is deducted under subparagraph 66.7(12)(b) in computing Company S's CCEE after November 30, 1987, i.e., $30 million.  As indicated in the hypothetical situation, Company S has chosen not to claim any deduction under subsection 66.1(2).

4.        Under subparagraph 66.7(3)(a)(iii), the amount of Company S's CCEE  ($30 million) which may be deducted by Company E would be reduced   by the amount which was deductible by Company S under subsection  66.1(2).  This amount would be determined by new paragraph 66.7(12)(b.1) which, in your view, would be $30 million.  You therefore conclude that Company E would not be entitled to a claim in respect of Company S's CCEE notwithstanding that Company S has not deducted the CCEE of $30 million.

Our Comments to B.

We do not share your interpretation of the relevant amendments proposed in July, 1990.

(i)  With respect to Company S not being required to claim the CCEE of $30 million under paragraph 66.1(2)(a), the Department of Finance has indicated during informal discussions that the July, 1990 proposed amendments were intended to provide Company S with the option under paragraph 66.1(2)(b) of claiming the deduction with respect to its presuccession CCEE.

(ii) While we agree with your interpretation of proposed paragraph 66.7(12)(b.1), we do not share your application thereof to the hypothetical situation.

Paragraph 66.1(12)(b.1) proposed in July, 1990 states:

(b.1) for the purpose of paragraph (3)(a), the cumulative Canadian exploration expense of the original owner determined immediately after the disposition that was deductible under subsection 66.1(2) or deducted under subsection 66.1(3) in computing the original owner's income for the year shall be deemed to be equal to the lesser of

(i)  the amount deducted in respect of the disposition under paragraph (b), and

(ii) the amount, if any, by which

(A)the specified amount determined under paragraph (12.1)(a) in respect of the original owner for the year...

New paragraph 66.7 (12.1)(a) states:

(a) the lesser of

(i)  the total of all amounts each of which is an amount deducted under paragraph (12)(b) in respect of a disposition in the year by the original owner, and

(ii)   the total of

(A) the amount claimed by the original owner for the year under  subsection 66.1(2) or (3), and...

Since S's claim under subsection 66.1(2) is nil, then the subparagraph 66.7(12.1)(a)(ii) amount would be nil.  Accordingly, the subparagraph 66.7(12)(b.1)(ii) amount would also be nil.

Consequently, "the amount which was deductible by Company S under subsection 66.1(2)" for purposes of determining Company E's claim under subparagraph 66.7(3)(a)(iii) would be nil and Company E would be eligible for deduction of Company S's CCEE of $30 million under subsection 66.7(3) in the above hypothetical circumstances.  This would not be so, however, if Company S had claimed or was required to claim a deduction in respect of its CCEE - refer to our comment in (i) above.

Section ChiefResource Industries SectionBilingual Services and Resource Industries DivisionRulings Directorate