17 June 1993 Income Tax Severed Letter 9315140 - Canadian Exploration Expense

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

              CANADIAN EXPLORATION EXPENSE

QUESTION 26

The definitions of Canadian exploration expense ("CEE") and Canadian development expense ("CDE") seem to indicate that the drilling costs related to any particular well must be either exclusively CEE or exclusively CDE (i.e. for any single well, the aggregate of all drilling costs may not be partly CEE and partly CDE, but must be either one or the other). Would Revenue Canada please give its views as to whether drilling costs are CEE or CDE in the following circumstances:

(i)       A well, originally drilled in 1988 and the drilling
          costs in respect of which the original drilling
          were CDE, is re-entered in 1993, and drilling is
          completed to a deeper zone.  A new pool (previously
          undiscovered reservoir) is found at this deeper
          formation.  The well is completed in 1993 as a
          dual-zone producing well.

(A) Are the 1993 drilling costs CEE or CDE?

    (B)   Does the 1993 drilling in any way impact the tax
          treatment of the 1988 drilling costs?

(ii)      Facts as for example (i) except that no
          accumulation is found at the deeper zone, so the
          well is plugged back to the original reservoir,
          from which it continues to produce.

(A) Are the 1993 drilling costs CEE or CDE?

    (B)   Does the 1993 drilling in any way impact the tax
          treatment of the 1988 drilling costs?

(iii)     Facts as for example (i), except that the 1988
          drilling expenses were originally considered to be
          CEE.

(A) Are the 1993 drilling costs CEE or CDE?

    (B)   Does the 1993 drilling in any way impact the tax
          treatment of the 1988 drilling costs?

(iv)      Facts as for example (i), except that the 1988
          drilling expenses were originally considered to be
          CEE, and no accumulation is found at the deeper
          zone, so the well is plugged back to the original
          reservoir, from which it continues to produce.

(A) Are the 1993 drilling costs CEE or CDE?

    (B)   Does the 1993 drilling in any way impact the tax
          treatment of the 1988 drilling costs?

DEPARTMENT'S POSITION

(i)  (A)  As the additional drilling resulted in a new
          discovery, 66.1(6)(a)(ii.1)(A) could apply to treat
          the 1993 drilling costs as Canadian exploration
          expense.

          According to an assessing policy, well recompletion
          costs related to the portion of the well that was
          drilled in 1993, the portion of the well that had
          been drilled in 1988 and the level where production
          was taken prior to the discovery of the new
          reserves, are considered to be Canadian exploration
          expense in accordance with 66.1(6)(a)(ii.1)(A). 

     (B)  Paragraph 66.1(9)(f) will permit the
          reclassification of the 1988 drilling, completion,
          temporary access road, and well site preparation
          costs (i.e. costs that originally qualified for
          inclusion in Canadian development expense in
          accordance with 66.2(5)(a)(i)(B)) to Canadian
          exploration expense.

(ii) (A)  The 1993 drilling costs, costs to plug the well
          back up to the point where the 1988 drilling ended
          and costs related to recompleting the portion of
          the well that had been drilled in 1988 are treated
          as Canadian development expense pursuant to
          66.2(5)(a)(i.1).

     (B)  There is no effect on the treatment of the 1988
          costs associated with the initial drilling and
          completing of the well.

(iii)(A)  As the additional drilling resulted in a new
          discovery, 66.1(6)(a)(ii.1)(A) could apply to treat
          the 1993 drilling costs as Canadian exploration
          expense.

          According to an assessing policy, well recompletion
          costs related to the portion of the well that was
          drilled in 1993, the portion of the well that had
          been drilled in 1988 and the level where production
          was taken prior to the discovery of the new
          reserves are considered to be Canadian exploration
          expense in accordance with 66.1(6)(a)(ii.1)(A). 

     (B)  There is no effect on the treatment of the 1988
          costs associated with the initial drilling and
          completing of the well.

(iv) (A)  The 1993 drilling costs, costs to plug the well
          back up to the point where the 1988 drilling ended
          and costs related to recompleting the portion of
          the well that had been drilled in 1988 are treated
          as Canadian development expense pursuant to
          66.2(5)(a)(i.1).

     (B)  There is no effect on the treatment of the 1988
          costs associated with the initial drilling and
          completing of the well. 

B.Rankin June 9, 1993 931514 CPTS June 17, 1993