7 June 1993 Ruling 9315201 F - Joint Exploration Corporation

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 Agreed Portion of Resource Expense

Question #34 

Subsection 163(2.2) of the Act imposes a penalty, in certain circumstances, where a joint exploration corporation ("JEC") renounces a greater amount of expenses than it was entitled to renounce. In the case of flow-through shares, there is a mandatory adjustment for excess renouncements pursuant to subsection 66(12.73) of the Act, but no similar such adjustment is stipulated in the case of JEC. Subsections 66(10) to (10.3) of the Act provide simply that upon the making of the election, the agreed portion will be deemed to have been incurred by the shareholder corporation, and will be deemed to have been deducted or deductible by the JEC. Does Revenue Canada agree that an excess renouncement by a JEC nonetheless results in such excess expenses being deemed to have been incurred by the shareholder corporation? If not, what is the effect, other than the possible imposition of the penalty under subsection 163(2.2) of the Act, of an excess renouncement for each of the JEC and the shareholder corporation?

Analysis and Position Taken

Pursuant to subsections 66(10) to (10.3) of the Act, the agreed portion must be in respect of a resource expense incurred by a JEC. Accordingly, any excess renouncement of the resource expense by the JEC results in such excess amount not considered as a part of the agreed portion, such excess resource expense not deemed to have been incurred by the shareholder corporation and not deducted nor deductible by the JEC from the resource pool.

In a situation wherein adjustments are required to reflect the reclassification of a resource expense to another resource expense (e.g., from CEE to CDE), there does not appear to be any provision of the Act which would allow a JEC to "retroactively" increase the agreed portion of the latter resource expense. If such reclassification results from an audit of the JEC, the Department is prepared to adjust the agreed portion of the latter resource expense. However, the adjustments will only be made if both parties either file a waiver for the relevant taxation year(s), or provide an undertaking that the reclassified expenditures will not subsequently be renounced or claimed by the JEC. In the event that the JEC makes a subsequent claim or renouncement, the Department will disallow the prior adjustments to the shareholder corporation. (See the Oil and Gas Issue Report #9 prepared by Audit Directorate, our memoranda #7-910656 and #7-3144.)