4 September 1998 External T.I. 9802455 - RENUNCIATION OF CEE

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: Can expenses renounced between related corporations be further renounced utilizing 66(12.66)?

Position: No.

Reasons: Requirements of 66(12.66)(b) not met under deeming provisions of 66(12.61)(a).

980245
XXXXXXXXXX A.A. Cameron
(613) 957-8975
Attention: XXXXXXXXXX

September 4, 1998

Dear Sirs:

Re: Renunciation of Canadian Exploration Expense (“CEE”)

This is in reply to your letter concerning the application of subsections 66(12.6), 66(12.66) and 66(12.71) 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. If you require confirmation of the tax consequences of proposed transactions involving specific taxpayers, a written request for an advance income tax ruling should be submitted in accordance with Information Circular 70-6R3 ("IC 70-6R3") dated December 30, 1996 and issued by Revenue Canada. Nevertheless, we can provide you with the following general comments with respect to the application of subsections 66(12.6), 66(12.66) and 66(12.71) of the Act.

Subsection 66(12.6) of the Act permits a corporation (the “First Corporation”) to renounce CEE that it incurs to a person who acquires “flow-through shares” [as defined in subsection 66(15) of the Act] issued by the corporation. Where under subsection 66(12.6) of the Act the First Corporation renounces an amount to another corporation (the “Second Corporation”) in respect of CEE, subject to subsections 66(12.69) to 66(12.702) thereof, paragraph 66(12.61)(a) of the Act will deem the CEE to be CEE incurred in that amount by the Second Corporation, on the effective date of the renunciation. In certain circumstances, the Second Corporation may be able to further renounce an amount in respect of that same CEE under subsection 66(12.6) of the Act.

However, by virtue of paragraph 66(12.67)(a) of the Act, such further renunciation by the Second Corporation would not be permitted if the First Corporation was not related to the Second Corporation for purposes of the Act. In addition, the ability of the Second Corporation to make such renunciation of CEE would remain subject to all of the other provisions of the Act which relate to the renunciation of qualifying expenses to a person who acquires flow-through shares, e.g., subsection 66(12.71) thereof.

Where the requirements of subsection 66(12.66) of the Act are satisfied, the so-called “lookback” rule, CEE incurred by a corporation in a particular calendar year (“Year 2”) will, for the purposes of subsection 66(12.6) of the Act, be deemed to have been incurred by the corporation on the last day of the immediately preceding calendar year (“Year 1”).

Although the Second Corporation may potentially further renounce an amount in respect of the CEE renounced to it by the First Corporation where these two corporations are related for purposes of the Act, pursuant to paragraph 66(12.66)(d) of the Act, the provisions of subsection 66(12.66) thereof are precluded from applying in respect to a renunciation in a calendar year by the First Corporation to the Second Corporation if at any time in that year those two corporations do not deal with each other at arm’s length for purposes of the Act. In other words, CEE incurred by the First Corporation in Year 2 could not be renounced by it to the Second Corporation effective as of the last day of Year 1 where those corporations were related for the purposes of the Act at any time in Year 2.

As noted above, an amount in respect of CEE incurred by the First Corporation in Year 2 can potentially be renounced to, and deemed to have been incurred by, the Second Corporation in Year 2. As such, the question arises as to whether the Second Corporation could rely on the provisions of subsection 66(12.66) of the Act in order to be able to renounce under subsection 66(12.6) of the Act, effective on the last day of Year 1, an amount in respect of this CEE to a person it deals with at arm’s length for purposes of the Act throughout Year 2. In our view, this would not be the case since CEE so deemed to have been incurred by the Second Corporation under paragraph 66(12.61)(a) of the Act would not satisfy the requirement contained in paragraph 66(12.66)(b) thereof, i.e., the provisions of paragraph 66(12.61)(a) of the Act would not have deemed such CEE to be expenses described in specific paragraphs of the definition of CEE in subsection 66.1(6) of the Act.

As indicated in paragraph 21 of IC 70-6R3, the comments contained herein are not income tax rulings and are not binding on Revenue Canada.

Yours truly,

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