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.
Issue Sheet
1993 CPTS Roundtable June 17, 1993
RE: Joint Exploration Corporation
No Balance in Resource Pools
Renouncement of Resource Expenses
Question #33
In the case of flow-through shares, there is a limitation that effectively restricts amounts that may be renounced to the balances of the cumulative resource pools (e.g., paragraph 66(12.6)(e) in the case of Canadian exploration expenses). There appears to be no similar restriction in the case of renouncements by joint exploration corporation ("JEC"). Does Revenue Canada agree that a renouncement may validly be made in the following situation?
Corporation A becomes a shareholder corporation of a JEC by subscribing for shares of JEC on January 1, Year 1. During Year 1, JEC incurs $1 million of Canadian development expenses. In December Year 1, the JEC sells all of its Canadian resource properties, for proceeds that exceed its aggregate balances in its cumulative Canadian exploration expense, cumulative Canadian development expense and cumulative Canadian oil and gas property expense pools. Notwithstanding that the JEC has a credit balance in its cumulative Canadian development expense pool prior to its year-end of December 31, Year 1, the JEC elects, by filing Form T2035 in January Year 2, to renounce the $1 million of Canadian development expense incurred in Year 1 in favour of Corporation A.
Analysis and Position Taken
Yes, the above-noted renouncement may validly be made. We agree that there is no requirement of limiting the renounced amounts to the extent of the balances of the cumulative resource pools under the subsections 66(10) to (10.3). We took a similar position with respect to a principal business corporation in the 1988 CPTS roundtable question #6. The renouncement would result in $1 million being considered as Canadian development expense deducted by the JEC in Year 1 pursuant to paragraph 66(10.2)(d). This would increase the JEC's negative balance of cumulative Canadian development expense, thereby increasing the JEC's Year 1 income under paragraph 59(3.2)(c).
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