28 April 1998 External T.I. E9801765 - cedoe canadian overhead and development

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.

980176
XXXXXXXXXX Denise Dalphy
(613) 957-9231

Attention: XXXXXXXXXX

April 28, 1998

Dear Sirs:

Re: Canadian Overhead and Development Expenses (“CEDOE”)

This is in reply to your letter of January 19, 1998 where you requested our views on the application of CEDOE, as defined in subsection 1206(1) of the Income Tax Regulations (the “Regulations”) to a hypothetical fact situation. In particular, you describe a situation where payments are made by one member (Co. A) of a joint venture to another member (Co. B) of that joint venture, to manage and control the operations of the joint venture, including purchasing materials, obtaining permits, maintaining accounting and financial records, and undertaking exploration and development, either itself or by contracting with third parties. The payments that Co. A will make to Co. B as manager of the joint venture will include Co. B’s direct costs as well as a management fee to cover its overhead and general administrative expenses.

If your query relates to completed transactions of a particular taxpayer, it would be appropriate that a determination be made by the relevant Tax Services Office, or if the interpretation sought is on transactions that are seriously contemplated in the near future, you may consider requesting an advance income tax ruling. The process for requesting advance rulings is described in Information Circular IC-70R3 dated December 30, 1996. Notwithstanding the foregoing, we are prepared to offer the following general comments.

In the hypothetical situation that you have presented, you have asked us to assume that the expenses of Co. B will be “Canadian exploration expense” within the meaning of subsection 66.1(6) of the Income Tax Act, that Co. A and Co. B will not be connected within the meaning of subsection 1206(5) of the Regulations, and that Co. B will receive the payments from Co. A as an independent contractor, and not as an agent. In our view, it would be a question of fact whether the full amounts paid from Co. A to Co. B to manage and operate the joint venture would be Canadian exploration expenses (CEE) or Canadian development expenses (CDE) made or incurred by Co. A, whether Co. B would truly be an independent contractor and not an agent, and whether Co. A and Co. B would deal at arm’s length with respect to the joint venture.

Finally, with respect to the definition of CEDOE in subsection 1206(1) of the Regulations, it is our view that, inter alia, paragraph (a) therein contains broad descriptive language (“in respect of”) which would require payments from Co. A to Co. B to be classified as CEDOE, if in fact the payments were actually CEE or CDE and to the extent that they are in respect of the administration, management or financing of Co. A.

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,

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