6 January 1995 External T.I. 9432485 - FARMOUT RE DRILLING 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.

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.

		943248
XXXXXXXXXX	A.A. Cameron

Attention: XXXXXXXXXX

January 6, 1995

Dear XXXXXXXXXX:

Re: Treatment of Certain Expenditures for Purposes of the Income Tax Act (the "Act")

This is in reply to your letter of December 14, 1994 wherein you requested our views with respect to the treatment for purposes of the Act of expenditures incurred in certain circumstances.

XXXXXXXXXX

You have requested our views as to whether such expenditures would qualify for treatment as Canadian exploration expense, within the meaning assigned such term in subsection 66.1(6) of the Act ("CEE"), to such individuals.

Our Comments

We are unable to provide any assurance as to the treatment for purposes of the Act of expenditures which it is contemplated will be incurred with respect to the Property. Assurances in respect of contemplated transactions are only given in the context of an advance income tax ruling. We will, however, provide the following general comments.

The appropriate treatment for the purposes of the Act of a particular expenditure incurred by a taxpayer will be a question of fact to be determined with reference to all the facts relevant to such expenditure, e.g., with reference to any agreements concerning same.

However, in a situation involving taxpayers which deal at arm's length for the purposes of the Act, it is our view that where, in consideration for earning an interest in a resource property for which no proven or probable mineral reserves have been established, an expense is incurred by a taxpayer in the course of drilling for the purpose of determining the existence, extent or quality of a mineral resource, such expense would represent CEE of that taxpayer under paragraph (f) of the definition of that term contained in subsection 66.1(6) of the Act provided that such expense is not Canadian development expense and cannot reasonably be considered to be related to a mine that has come into production in reasonable commercial quantities or to be related to a potential or actual extension thereof.

The terms "mineral resource" and "Canadian development expense" have the meanings assigned, respectively, by subsections 248(1) and 66.2(5) of the Act.

The foregoing comments represent our general views with respect to the subject matter. 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.

Yours truly,

for A/Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Policy and Legislation Branch