29 July 1998 External T.I. E9816275 - CEDOE, EXPLORATION & DEVELOPMENT EXPENSES

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: interpretation of "or" at the end of subparagraph (d)(v) in the definition of CEDOE in Reg 1206 -does the formula require a determination of the least amount related and unrelated costs of connected persons or the least amount of related costs of connected persons ?

Position: read "or" in exclusive sense, so only one of (iv),(v) or (vi) will apply to a particular expense

Reasons: principles of statutory interpretation, otherwise interpretation of the provision would be absurd

XXXXXXXXXX 981627
Denise Dalphy

Attention: XXXXXXXXXX

July 29, 1998

Dear Sirs:

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

This is in reply to your letter of June 18, 1998 with regard to paragraph (d) of the definition of CEDOE in subsection 1206(1) of the Income Tax Regulations.

The definition of CEDOE is applied on an expense by expense basis, and the total of CEDOE expenses forms a “pool” of CEDOE. The midamble of paragraph (d) of the definition of CEDOE provides, in general terms, that a particular Canadian exploration expense or a Canadian development expense that falls within one of the descriptions in subparagraph (i), (ii) or (iii) is CEDOE to the extent that the expense exceeds the least amount of certain costs of a connected person.

The word “the” in subparagraph (iv) refers to the expenses described in subparagraph (i), (v) to (ii), and (vi) to (iii). In our opinion, the word “or” at the end of subparagraph (v) should be read in an exclusive sense, so that for any one particular Canadian exploration expense or Canadian development expense that falls within subparagraph (i), (ii) or (iii), only one of subparagraphs (iv), (v) or (vi) will apply. Accordingly, paragraph (d) of the definition of CEDOE requires a taxpayer to compare a particular expense in subparagraph (i), (ii) or (iii) with the total related costs of each connected person and the difference between the amount of that expense and the least of the amounts determined for each connected person will be CEDOE; the paragraph does not require a comparison of costs of connected persons that are related and unrelated to the particular expense.

The following example illustrates our interpretation of the provision. Company A, which is connected with Company X and Company Y, pays $1000 to purchase gas from Company X to be used to operate a drilling rig. The total of Company X’s costs in respect of the gas is $800 ($100 + $300 + $400). Company X had purchased the gas from Company Y, and Y’s costs in respect of the gas were $600 ($450 + $50 + $100). The result of applying paragraph (d) of the definition CEDOE would cause $400 of A’s payment of $1000 to be CEDOE: the difference between Company A’s expense of $1000 and the least of $800 and $600. In applying the definition of CEDOE in paragraph (d) to A’s gas purchase, the amount that A paid to connected persons for services or the use of property would not be relevant.

You have also asked for our interpretation of the words, “costs incurred by a person” in the midamble cited above in connection with a particular situation. Paragraph (b) of subsection 1206(5) of the Regulations describes situations where certain outlays, expenses or amounts will not be “costs incurred by a person” for the purposes of the definition of CEDOE in subsection 1206(1) and subsection 1206(6) of the Regulations.

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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