28 September 1989 Income Tax Severed Letter AC57900 - Cumulative Canadian Exploration Expense (CCEE)

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.

5-7900
                                                  John Chan
                                                  (613) 952-9019

September 28, 1989

Dear Sirs:

Re: Cumulative Canadian Exploration Expense (CCEE) Paragraphs 66.1(2)(a) and 66.7(12)(o) of the Income Tax Act (the "Act")

We are writing in reply to your letter of April ID, 1989, in which you requested our comments regarding your interpretation of the above mentioned provisions in reference to a hypothetical situation which you provided.

In your hypothetical situation, a principal-business corporation (PBC) which carries on the business of oil and gas exploration and development sells all of its oil and gas related properties and assets to a purchaser corporation and immediately thereafter ceases all operations or alternatively does not carry on any of the businesses described in paragraph 66(15)(h) of the Act. The corporation and the purchaser jointly elect under paragraph 66.7(7)(e) of the Act in prescribed form and within the times referred to therein to have the "successor rules" and in particular subsection 66.7(3) of the Act apply to the purchaser.

Your position is that provided no Canadian exploration expense (GEE) is incurred after the date of the sale by the corporation, the corporation would not be required to claim any CCEE pursuant to paragraph 66.1(2)(a) of the Act in computing its income for the taxation year in which the disposition occurs because its CCEE would be nil at the end of that year.

You have also asked us to comment on an alternative position that since the corporation ceases to be a PBC immediately after the disposition of its oil and gas related properties and assets, therefore, it is entitled to claim CCEE on a discretionary basis pursuant to subsection 66.1(3) of the Act.

OUR COUNTS

We do not share your interpretation of the aforesaid provisions.

We understand that the intention of paragraph 66.7(12)(b) of the Act is to require a PBC to deduct, in the year of disposition, its CCEE to the extent of its income for that year. Prior to the introduction of section 66.7, former subsection 66.1(4) of the Act operated in a similar way. The successor corporation could only deduct amounts in respect of a predecessor's CCEE to the extent that amounts were not deductible by the predecessor. In the year of disposition, a predecessor was required to make a deduction to the extent of its income. It was not intended that this requirement be changed with the coming into force of section 66.7 of the Act.

We disagree with your contention that the balance of the corporations's CGEE pool would be nil following the sale and at the end of the year in which the disposition occurs.

The calculation of CCEE at any time requires a reduction under subparagraph 66.1(6)(b)(xii) of the Act. This reduction is in respect of amounts required to be deducted from CCEE under paragraph 66.7(12)(b) of the Act. Paragraph 66.7(12)(b) of the Act states that the amount to be deducted is the amount of CCEE immediately after disposition in excess of the amount claimed under subsection 66.1(2) of the Act. The amount of reduction under subsection 66.7(12)(b) of the Act can therefore only be determined the 66.1(2) claim has been made for the year. Subsection 66.1(2) of the Act requires a PBC to claim a deduction in respect of its CCEE pool to the extent of its income for the year.

Consequently, if such a corporation is an "original owner", the CCEE pool available to a "successor" is therefore reduced by any amount that is deductible by the original owner in the year of disposition. Regarding your alternative position of a corporation that ceases to be a PBC immediately after the time of sale of its oil and gas related properties and assets, our position with respect thereto is stated in IT Bulletin 400 at paragraph 6 thereof:

"In determining whether a corporation qualifies as a principal-business corporation, its activities for the full taxation year must be considered, not just the activities at a particular point in time." (underlining added)

The above comments are only expressions of opinion and as such should not be construed as advance income tax rulings, nor are they binding on the Department.

Yours truly,

Chief Resource Industries Section Bilingual Services & Resource Industries Division Rulings Directorate