13 July 1999 External T.I. 9913875 - PARAGRAPH 66(12.6)(A)

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: Would the provisions of paragraph 66(12.6)(a) apply to reduce the amount available for renunciation for an amount of "assistance", related to the expenses in question and arising under the BC Mining Exploration Tax Credit, if the taxpayer has not applied for the BC METC or if the expenses in question are "deemed" to have been incurred due to the application of subsection 66(12.66).

Position: Whether a corporation can reasonably be expected to receive a particular amount of assistance at any time is a question of fact to be determined with reference to the facts of a particular situation. However, the fact that a corporation has a) not applied for the BC METC, or b) has been deemed to incur the expenses in question due to the application of 66(12.66) will not, in and by themselves, prevent a reduction from arising under paragraph 66(12.6)(a).

Reasons: Consistent with the "Technical Notes" issued by the Minister of Finance in June of 1986 concerning the addition of subsections 66(12.6) and (12.66) to the Act.

991387
XXXXXXXXXX A.A. Cameron
(613) 347-1361
Attention: XXXXXXXXXX

July 13, 1999

Dear Sirs:

Re: Paragraph 66(12.6)(a) of the Income Tax Act (the "Act")

We are writing in response to your letter requesting an interpretation concerning the above provision of the Act and the provisions of the Mining Exploration Tax Credit ("METC") program of the Province of British Columbia.

You have asked for our views as to when the provisions of paragraph 66(12.6)(a) of the Act would apply to reduce the qualifying expenses otherwise available for renunciation to an investor in respect of a "flow-through share", for an amount of "assistance" related to such expenses [both such terms having the meanings assigned by subsection 66(15) of the Act]. In particular, you have asked the following questions:

1. Would it apply to reduce the pool if the corporation has incurred qualifying exploration expenses but has not applied for the tax credit, as required by our legislation, in respect of the amount of METC that the corporation could claim on those expenses?

2. Would it apply before any expenses have been incurred by the corporation, in respect of the amount of METC that the corporation could claim on expenditures that are deemed to have been incurred before the particular time, if the flow-through share agreement indicates that the funds raised will all be spent on expenses qualifying for the METC?

With regard to the second question, you have indicated that you "...are concerned with the result that may be obtained if a corporation renounces expenses which are deemed to have been incurred under the special 'look-back' rules in the Act but have not actually been incurred by the corporation before the effective date of the renunciation."

Our Comments

The provisions of paragraph 66(12.6)(a) of the Act provide for a reduction to the amount that may be renounced to an investor in flow-through shares with regard to otherwise qualifying expenses (such expenses being "specified expenses") for:

...the assistance that the corporation has received, is entitled to receive or can reasonably be expected to receive at any time, and that can reasonably be related to the specified expenses or to Canadian exploration activities to which the specified expenses relate (other than assistance that can reasonably be related to expenses referred to in paragraph (b) or (b.1), ...

Therefore, (assuming the "assistance" in question "can reasonably be related to" the relevant expenses or activities and is not covered by the exceptions provided) if the corporation can reasonably be expected to receive that assistance at any time, the above paragraph will require a reduction for such assistance at the time of the renunciation. Whether or not this latter test is satisfied is a question of fact to be determined with reference to the facts of a particular situation. However, in our view, the fact that a corporation a) has not applied for the BC METC, or b) has been deemed to incur the expenses in question due to the application of subsection 66(12.66) would not, in and by themselves, prevent a reduction from arising under paragraph 66(12.6)(a) of the Act.

In our opinion, the above views are consistent with the "Technical Notes" issued by the Minister of Finance in June of 1986 concerning the addition of subsections 66(12.6) and (12.66) to the Act (applicable with respect to expenses incurred after February 1986). Those Notes indicated that subsection 66(12.6) would permit a renunciation where certain "conditions" were met including that "...the expenses must be renounced net of any assistance (as defined in new paragraph 66(15)(a.1)) the corporation receives or may receive in respect of the CEE or in respect of exploration activities to which the expenses relate..." (emphasis added). In addition, those Notes also indicated that resource expenses deemed to have been incurred on the last day of the preceding taxation year under subsection 66(12.66) would be "net of any assistance".

Please contact the writer if you have any further questions regarding this matter.

Yours truly,

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

c.c. Bruno Fioravanti