17 September 1993 Income Tax Severed Letter 9318075 - Flow-through Share Renounciations

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.

                                           931807
XXXXXXXXXX                                 A.A. Cameron
                                           (613) 957-8975
Attention: XXXXXXXXXX

September 17, 1993

Dear Sirs:

Re: Flow-through Share Renunciations

This is in reply to your letter dated June 18, 1993 wherein you requested an opinion concerning whether four types of diamond exploration expenditures would qualify for renunciation as CEE under the relevant flow-through share provisions of the Income Tax Act (the "Act") and the Income Tax Regulations (the "Regulations").

Since the transactions described in your letter would appear to relate to a situation involving an actual taxpayer, we are unable to provide specific comments as to the income tax consequences arising as a result thereof. Assurances concerning such consequences are only provided through advance income rulings, issued under the guidelines detailed in Information Circular 70-6R2 and the Special Release thereto dated September 30, 1992, concerning proposed transactions. We will, however, provide our general views with regard to the issues raised above.

Whether any expenditure qualifies for treatment as Canadian exploration expense ("CEE") is a question of fact to be determined from all of the relevant facts and circumstances. In this regard, the requirements of paragraph 66.1(6)(a) of the Act would have to be satisfied in order for the expenditure to be treated as CEE.

Provided that all of the requirements of the relevant provisions of the Act and Regulations have been satisfied, CEE can be renounced by a corporation pursuant to subsection 66(12.6) of the Act in respect of flow-through shares issued by the corporation. The CEE which may be renounced would have to be reduced, under paragraph 66(12.6)(b) of the Act, by any of those CEE expenses that are prescribed Canadian exploration and development overhead expenses ("CEDOE").

Pursuant to subsection 1206(4.2) of the Regulations, "prescribed CEDOE" refers to the definition of CEDOE which is found in subsection 1206(1) of the Regulations as follows:

"Canadian exploration and development overhead expense" of a taxpayer means a Canadian exploration expense or a Canadian development expense of the taxpayer made or incurred after 1980

     (a)  that was in respect of the administration,
          management or financing of the taxpayer,

     (b)  that was in respect of the salary, wages or other
          remuneration or related benefits paid in respect
          of a person employed by the taxpayer whose duties
          were not all or substantially all directed towards
          exploration or development activities,

     (c)  that was in respect of the upkeep or maintenance
          of, taxes or insurance in respect of, or rental or
          leasing of, property other than property all or
          substantially all of the use of which by the
          taxpayer was for the purposes of exploration or
          development activities, or

     (d)  that may reasonably be regarded as having been in
          respect of

          (i)  the use of or the right to use any property
               in which any person who was connected with
               the taxpayer had an interest,

          (ii) compensation for the performance of a service
               for the benefit of the taxpayer by any person
               who was connected with the taxpayer, or

          (iii)the acquisition of any materials, parts or
               supplies from any person who was connected
               with the taxpayer

to the extent that the expense exceeds the least of amounts, each of which was the aggregate of the costs incurred by a person who was connected with the taxpayer

          (iv) in respect of the property,

          (v)  in respect of the performance of the service,
               or

          (vi) in respect of the materials, parts or
               supplies;

In general terms, the effect of paragraph 66(12.6)(b) of the Act is that expenditures which qualify for treatment as CEE but which also fall within the ambit of the definition of CEDOE would not be eligible for flow-through share renunciation.

The four types of diamond exploration expenditures in respect of which you requested our comments in the context of flow-through share renunciations are:

1. Management and administration fees.

2. Fees paid to foreign consultants whose expertise is river and coastal diamond concentration.

3. Basic on-site sampling and test equipment which include picks, shovels, sample bags, screens, small jigs and concentrators, etc.

4. Insurance.

Management and administration fees would fall into the ambit of paragraph (a) of the definition of CEDOE and would therefore not be eligible for flow-through share renunciation.

The foreign consultants fees alluded to in 2. above would be eligible for renunciation provided that, among other things, the fees qualify for treatment as CEE and they do not qualify as CEDOE. There is not sufficient information to enable us to provide any further comments in this regard.

Expenditures on materials and supplies for a diamond exploration program which are incurred for the purposes set out in subparagraphs 66.1(6)(a)(iii) or (iii.1) or which satisfy the requirements of any of the other relevant provisions of the definition of CEE in paragraph 66.1(6)(a) of the Act may be eligible for flow-through share renunciation, subject to paragraph (d) of the definition of CEDOE. However, any equipment included in 3. above which is a property described in any of the classes in Schedule II to the Regulations would be precluded from treatment as CEE and would therefore not be eligible for flow-through share renunciation. For example, picks and shovels costing less than $200 are properties which would be included in paragraph (h) of Class 12 in Schedule II and a jig is included in Class 12 in Schedule II by virtue of paragraph (d) thereof. Consequently, such expenditures on any property which is included in any class in Schedule II to the Regulations would not be eligible for flow-through share renunciation because they would not constitute CEE.

Insurance, other than insurance that is in respect of property all or substantially all of the use of which by the taxpayer was not for the purposes of exploration or development activities, would be eligible for flow-through share renunciation provided that the insurance qualifies as CEE, i.e., it must be incurred for the purposes set out subparagraphs 66.1(6)(a)(iii) or (iii.1) or satisfy the requirements of any of the other relevant provisions of the definition of CEE in the Act.

The foregoing comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to a different conclusion. In accordance with paragraph 21 of Information Circular 70- 6R2, the comments expressed herein do not constitute an advance income tax ruling and consequently are not binding on Revenue Canada—Customs, Excise and Taxation.

Yours truly,

for Director Manufacturing Industries, Partnerships and Trusts Division Rulings Directorate Legislative and Intergovernmental Affairs Branch