16 February 1996 External T.I. 9601605 - CEE ON SUB'S PROPERTY FOR NO CONSIDERATION

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.

Principal Issues:

(1) Do exploration expenses incurred by a corporation on property owned by a wholly-owned subsidiary for no consideration qualify as CEE of the corporation? (2) Any tax implications to the subsidiary?

Position:

(1) Question of fact. (2) Subsection 246(1) may apply to the Subsidiary.

Reasons:

(1) If acting as agent of subsidiary or the expenditures are additional investment in the subsidiary, then the expenditures would not be CEE of the corporation but CEE of the subsidiary. (2) Parent is conferring a benefit on the subsidiary which is at least equal to the amount of the exploration expenses incurred by the parent.

		960160
XXXXXXXXXX              	A. Seidel
(613) 957-8974
Attention:  XXXXXXXXXX

February 16, 1996

Dear Sirs:

Re: Flow-through Shares

This is in reply to your letter dated January 9, 1996, concerning the issue of flow-through shares by a corporation which will incur Canadian exploration expenses on Canadian resource property of a wholly-owned subsidiary for no consideration from the subsidiary. "Flow-through share" and "Canadian resource property" have the meaning assigned by subsection 66(15) of the Income Tax Act (the "Act").

The situation described in your letter appears to relate to specific taxpayers and an actual fact situation. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your local Taxation Services Office. To the extent that you require confirmation of the tax consequences of proposed transactions, we bring to your attention Information Circular 70-6R2 ("IC 70-6R2") dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers should be the subject of a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can provide you with the following general comments.

In the situation where a corporation has issued flow-through shares, entered into an agreement to incur exploration expenses using the proceeds from the flow-through share issue and the expenses incurred by the corporation are described in the definition of "Canadian exploration expense" ("CEE") in subsection 66.1(6) of the Act, such expenses would qualify for renunciation to the flow-through shareholders by virtue of subsection 66(12.6) of the Act. The corporation may incur the exploration expenses on its own Canadian resource properties or on properties owned by a wholly-owned subsidiary. However, where the exploration work is conducted for no consideration, it is conceivable that the corporation is conducting the exploration activities as the agent for its wholly-owned subsidiary. If so, the CEE would be CEE incurred by the subsidiary and not the corporation. Therefore the corporation would not have incurred any CEE that could be renounced to the corporation's flow-through shareholders pursuant to subsection 66(12.6) of the Act.

It is also conceivable, depending on the terms of the agreement pursuant to which the corporation is conducting the exploration on the subsidiary's property, that the exploration expenditures could be considered to be an additional investment in the subsidiary, either as an inter-company loan or an additional investment in the subsidiary. It is our view that any exploration expenditures which are incurred by a corporation in respect of an additional investment in the subsidiary would not be CEE of the corporation and the corporation would not have any amounts that could be renounced to its flow-through shareholders pursuant to subsection 66(12.6) of the Act.

In arm's length situations, the corporation incurring the exploration expenses on properties that it does not own would normally do so for fair market value consideration. In the situation where a corporation incurs exploration expenses by conducting exploration activities on properties owned by a wholly-owned subsidiary for which the corporation will not receive any consideration, it is our view that the corporation has conferred a benefit on its subsidiary. The amount of the benefit would, as a minimum, be equal to the exploration expenses incurred by the corporation in respect of properties held by the subsidiary and the amount thereof would be included in the income of the subsidiary pursuant to subsection 246(1) of the Act.

These comments are provided in accordance with the guidelines set out in paragraph 21 of IC 70-6R2.

Yours truly,

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch