28 October 1998 External T.I. E9825685 - EXPENSES "INCURRED" FOR PREAMBLE TO 66(12.6)

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: For the purposes of the preamble of subsection 66(12.6), is the relevant CEE restricted to that which is incurred pursuant to the particular "agreement in writing"?

Position: No. For these purposes the relevant CEE is that incurred during the particular "24 month" period and on or before the effective date of the renunciation in question.

Reasons: Our historic position is that the preamble to subsection 66(12.6) does not contain such a restriction. In addition, the definition of flow-through share indicates the corporation must incur qualifying expenses in an amount "not less than" the relevant consideration. However, it should be noted that a renunciation in respect of a particular flow-through share would remain subject to numerous other tests, e.g., regarding when the CEE in question must have been incurred or limiting the amount of such renunciations, etc.

						982568
XXXXXXXXXX 					A.A. Cameron
(613) 957-8975
Attention:	XXXXXXXXXX 

October 28, 1998

Dear Sirs:

Re: Subsection 66(12.6) of the Income Tax Act (the “Act”)

We are writing in response to your letter of September 15, 1998 concerning the above provision of the Act and amounts arising under the Mining Exploration Tax Credit (“METC”) program introduced this year by the government of British Columbia. Your letter was forwarded for our reply by Mr. Bruno Fioravanti.

You have indicated that the METC is a refundable tax credit for British Columbia taxpayers that undertake “grass roots” mining exploration in British Columbia and that the credit is 20 per cent of qualifying expenditures net of assistance (excluding the credit itself). You have also indicated that an investor in a “flow-through share” (within the meaning assigned that term in subsection 66(15) of the Act) is not entitled to METC on expenses so renounced to that investor under the Act as the qualifying expenditures must have been incurred by the person claiming the credit. However, a corporation having incurred qualifying expenditures would remain entitled to claim METC in respect of those expenditures notwithstanding that an amount has been renounced in respect thereof to an investor in a flow-through share (an “Investor”).

Your particular concern relates to the effect that an amount of METC arising to a corporation will have on the ability of that corporation to renounce an amount to an Investor under subsection 66(12.6) of the Act. To illustrate your view, you have provided the following example involving a corporation (“Corporation A”) which we understand would be a “principal-business corporation” (as defined in subsection 66(15) of the Act) and which would:

- enter into an “agreement in writing” (of the type envisioned in the above-mentioned definition of flow-through share) with an individual (“Mr. X”) on January 15, 1999 under which Mr. X pays $100 as sole consideration for the issuance by Corporation A of a flow-through share;

- not enter into any other such “agreement in writing”;

- incur $125 of “Canadian exploration expense” (“CEE”; within the meaning assigned that term in subsection 66.1(1) of the Act) during the 24 month period commencing February 1, 1999 (being $25 from its own resources and $100 from the above issuance of flow-through shares);

- claim $25 of METC but have no other “assistance” [within the meaning assigned that term in subsection 66(15) of the Act] for the purposes of paragraph 66(12.6)(a) of the Act with respect to the $125 of CEE.

You have asked if we agree with your view that:

...subsection 66(12.6) would permit Corporation A to renounce $100 to Mr. X, provided Corporation A has at least $100 in its cumulative [CEE] pool at the effective date of the renunciation and the other requirements of the flow-through share rules are met.

Our Comments

Pursuant to the preamble to subsection 66(12.6) of the Act, the CEE in respect of which Corporation A could potentially renounce an amount thereunder to Mr. X in the above example would be that incurred by it “in the period that begins on the day the agreement was made and ends 24 months after the end of the month that includes that day”, i.e., CEE incurred in the period beginning January 15, 1999 and ending January 31, 2001. Provided of course that with respect to any particular such renunciation the relevant CEE would have to have been incurred before the effective date of the renunciation (such relevant CEE being referred to in the preamble to subsection 66(12.6) of the Act as the “specified expenses”).

The “assistance” which Corporation A would be required to deduct under paragraph 66(12.6)(a) of the Act from the specified expenses, as part of the determination of the amount available for renunciation to Mr. X under subsection 66(12.6) thereof, would be that which Corporation A “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” (subject to certain exceptions which we understand are not relevant to this situation).

As such, subject to the application of other provisions of the Act [including the remainder of subsection 66(12.6) thereof] pertaining to flow-through shares, it is our view that Corporation A should have, in aggregate, an amount of $100 (being $125 - $25) available to renounce, effective as of a date on or after the full $125 of CEE has been incurred by it, to Mr. X under subsection 66(12.6) of the Act.

Notwithstanding the above result, it is likely that in most cases where flow-though shares are issued by a corporation several Investors would be involved. As such, it is also our view, that, in the absence of securities legislation to protect their respective interests, those Investors would insist that provisions be included in the relevant “agreement in writing,” share conditions, etc., to ensure that an appropriate sharing of the “grind” arising from METC would occur, i.e., to prevent the corporation from being able to renounce the full amount of a particular Investors investment to the detriment of other Investors.

We would also note that the legislation concerning the METC enclosed with your letter provides in part that :

Subject to subsection (3), an eligible taxpayer who has incurred qualified mining exploration expenses in a taxation year may claim a mining exploration tax credit under this section for the taxation year.

(emphasis added)

Paragraph 66(12.61) of the Act indicates that CEE renounced by a corporation to a person “shall be deemed to be [CEE] incurred in that amount by the person on the effective date of the renunciation” (emphasis added).

The phrase “qualified mining exploration expense” is defined in the above METC legislation, however, that definition refers to “any expense incurred by the taxpayer” within a specified time period “including” expenses relating to certain listed activities but not including an “excluded expense.”

Therefore, to the extent that subsection 66(12.61) of the Act may be relevant to your situation, it would appear that the potential could exist for both the corporation and the Investor to argue entitlement to the METC. As such, you may wish to consider amending the above METC legislation to preclude such an argument, e.g., by either specifying that a “renounced” expense would be an “excluded expense” or by defining “qualified mining exploration expense” by reference to specific provisions in the definition of CEE in the Act.

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