19 April 1999 External T.I. 9906895 - PLACER MINING - 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: i) Does the document “Guidelines on the Taxation of Placer Miners” dated January 7, 1992 and issued by the Audit Directorate of Revenue Canada still have application?

ii) Do any other guidelines currently exist with regard to placer mining which delineate between expenses qualifying under paragraphs (f) and (g) of the CEE definition?

Position: i) Yes.

ii) No.

Reasons: As confirmed through informal discussions with the mining Industry Specialist in the Verification, Enforcement and Compliance Research Branch. Also due to the question of fact nature of the determination as to the satisfaction of the respective purpose tests contained in the above paragraphs of the CEE definition.

990689
XXXXXXXXXX A.A. Cameron
(613) 957-8975
Attention: XXXXXXXXXX

April 19, 1999

Dear Sirs:

Re: XXXXXXXXXX

We are writing further to your facsimile with regard to the above XXXXXXXXXX and activities relating to placer mining for gold. We also acknowledge our telephone conversations concerning this matter.

XXXXXXXXXX

In particular, you have asked the following questions:

I) “What types of placer gold exploration activity are likely to fall under paragraph ...” (f) of the CEE definition, e.g., “...would the expenses incurred by a placer miner removing overburden with a frontend loader in the course of trenching...” so qualify?

II) Does the document entitled “Guidelines on the Taxation of Placer Miners” dated January 7, 1992 and issued by the Audit Directorate of Revenue Canada (the “Guidelines”) still have application? Do guidelines currently exist with regard to placer mining which delineate between expenses qualifying under paragraphs (f) and (g) of the CEE definition?

Our Comments

Paragraph (f) of the CEE definition is “inclusive” in nature, i.e., although reference is made to expenses “incurred in the course of” certain specified activities, an exhaustive listing of qualifying expenses is not provided. However, inclusion under that paragraph is subject to certain specified exclusions, as well as satisfaction of a purpose test, i.e., the expense must have been incurred by the taxpayer “...for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada...”. (The term “mineral resource” being defined in subsection 248(1) of the Act for the purposes thereof.)

As such, provided the expense in question is not expressly excluded from paragraph (f) of the definition of CEE, it will have to be determined from the facts of the relevant placer mining situation under consideration, whether a particular expense incurred by a taxpayer will qualify for inclusion in the CEE of that taxpayer by reason of satisfying the purpose test described above which is contained in that paragraph.

Except for the Guidelines (which remain in use), we are not aware of any guidelines which have been established by Revenue Canada in the context of placer gold mining for the purpose of determining whether expenses may qualify under paragraphs (f) or (g) of the CEE definition. We would note that paragraph (g) of the definition of CEE is also “inclusive” in nature and that such paragraph also contains a “purpose” test, i.e., the expense must have been incurred by the taxpayer “...for the purpose of bringing a new mine in a mineral resource in Canada into production in reasonable commercial quantities and incurred before the coming into production of the new mine...”.

A listing of the principal differences between placer mines and hard rock mines is provided in “Exhibit 1” to the Guidelines. Item j) to that listing indicates that:

j) in placer mining operations there is less clear demarcation between the following phases:

- exploration,
- development of the mine to commercial production,
- mining,
- processing the pay gravel,

Some equipment can be used for all (4) activities.

In addition, it is indicated in item g) that:

g) many placer miners believe that the cost of exploration drilling to find ore reserves is about equal to the cost of finding these reserves by mining; consequently, they prefer to initiate mining in an unexplored area instead of conducting exploration drilling.

The above excerpts from the Guidelines indicate that determining the cutoff between expenses qualifying under paragraph (f) of the definition of CEE and those qualifying under paragraph (g) thereof may be more difficult in a placer mining situation, i.e., due to the difficulty in delineating between the phases of “exploration” and “development of the mine to commercial production” referred to in the Guidelines.

In any case, the determination of whether an expense has been incurred by a taxpayer “...for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada...” as envisioned in paragraph (f) of the CEE definition will remain a question to be determined from the facts of a particular placer mining situation. As such, while the removal of overburden may be an activity which is beyond the “exploration” stage in certain mining situations (as envisioned by a reference thereto in subparagraph (g)(i) of the definition of CEE), it would have to be determined from the facts of the relevant situation whether “the expenses incurred by a placer miner removing overburden with a frontend loader in the course of trenching” would qualify for inclusion under paragraph (f) of the definition of CEE.

This opinion should not be construed as an advance income tax ruling and is not binding on Revenue Canada. Our practise is to make this specific disclaimer in all instances in which we provide an opinion. We refer you in this respect to paragraph 22 of Information Circular 70-6R3.

Please contact the writer, if we can be of further assistance with regard to this matter.

Yours truly,

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