3 November 1999 Income Tax Severed Letter 9917845 - File 980245 — 66(12.66)

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.

SUMMARY: File 980245 - 66(12.66)—ITA-66(12.66), 66(12.6), 66(12.61)—Changes to a technical interpretation dated September 4, 1998, file #980245, concerning the renunciation of Canadian exploration expenses and the application of subsections 66(12.6) and 66(12.66) of theIncome Tax Act.

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: Update to opinion expressed in file #980245 as to whether CEE deemed to have been incurred upon a renunciation under subsection 66(12.6) between related corporations can be further renounced utilizing 66(12.66).

POSITION: Potentially, depending upon the facts of the situation.

REASONS: Provided the legislative requirements are otherwise satisfied, retention of character of expenses deemed to have been incurred upon a renunciation under subsection 66(12.6) between related corporations such that those expenses may be further renounced to arm's length investors is consistent with the tax policy underlying subsection 66(12.66).

991784 XXXXXXXXXX A.A. Cameron (613) 347-1361 Attention: XXXXXXXXXX November 3, 1999

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

Further to your facsimile and our various telephone conversations regarding a technical interpretation (dated September 4, 1998 our file #980245; the “Opinion”) concerning the above subject, we wish to inform you that we have updated the views expressed therein with regard to the application of subsections 66(12.6) and 66(12.66) of theIncome Tax Act(the “Act”). In the Opinion the following general comments were provided with regard to the above provisions 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. The question ultimately being addressed in the Opinion was expressed as follows: 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 the Opinion, the view was expressed that “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.” Update We have reconsidered this matter since issuance of the Opinion and have taken into account the decision of the Tax Court of Canada in theWarren Mitchell case,[1999] 2 C.T.C. 2721 99 C.T.C. 2721. It is now our opinion that, for the purposes of applying subsection 66(12.66) of the Act with regard to a flow-through share agreement between the Second Corporation and a person with whom it deals at arm's length for purposes of the Act throughout Year 2, the CEE incurred by the Second Corporation in Year 2 will be considered to include CEE deemed to have been incurred by it pursuant to paragraph 66(12.61)(a) of the Act as a result of a renunciation under 66(12.6) thereof by the First Corporation provided that: at the time of the renunciation by the First Corporation it is related to the Second Corporation for purposes of the Act; the effective date of the renunciation by the First Corporation is in Year 2; the CEE so renounced by the First Corporation is incurred by it before the effective date of the renunciation and is CEE of the type referred to in paragraph 66(12.66)(b) of the Act before it is renounced by the First Corporation. In accordance with paragraph 21 of IC 70-6R3 [Information Circular 70-6R3], the comments contained herein are not income tax rulings and are not binding on the Canada Customs and Revenue Agency. Yours truly, for Director Resources, Partnerships and Trusts Division Income Tax Rulings and Interpretations Directorate Policy and Legislation Branch