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: treatment of bulk sample revenue
Position: reduces CCEE
Reasons: 66(12.1)
XXXXXXXXXX 981713
Denise Dalphy
Attention: XXXXXXXXXX
December 23, 1998
Dear Sirs:
Re: Proceeds from Sale of Bulk Sample
This is in reply to your request for our opinion on the income tax treatment of revenue received by a taxpayer from the sale of the output from a mine in the period prior to the date of the commencement of production in reasonable commercial quantities.
When a mine is in the development stage and shafts, raises and passageways are being excavated and stopes begun, quite often ore is brought to the surface and run through the mill. Occasionally, what is called a bulk sample is run through the mill when a mine is in the development stage. This is done in order to determine how best to separate the desired metal from the host rock during the milling or concentrating process. This could involve several hundred tons, deliberately mined for this purpose. Activities such as these as well as mill start-up runs, result in some production before the date on which the mine comes into production in reasonable commercial quantities ("commercial production"). Such production is usually immediately sold to generate what is commonly called pre-production revenue.
The application of subsection 66(12.1) of the Income Tax Act (the “Act”) to a specific situation depends on the facts that link a particular amount that has become receivable to a cost of property or services which may reasonably be regarded as having been primarily CEE or CDE. In our view, pre-production revenue may fall within the ambit of subsection 66(12.1) of the Act. Where paragraph 66(12.1)(a) applies, a taxpayer’s “cumulative Canadian exploration expenses” is reduced by consideration received (including revenue from a bulk sample where the original cost relates to CEE of the taxpayer). However, on an administrative basis, there has been a long-standing agreement between industry and the Department whereby the Department agreed not to object where a Canadian exploration expense was reduced by the related pre-commercial production revenue.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R3, the above comments do not constitute an income tax ruling and accordingly are not binding on the Department. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Yours truly,
John Chan, Manager
Resource Industries Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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