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.
Principal Issues: Clarification of views expressed in earlier memorandum concerning certain environmental assessment expenses.
Position: The appropriate treatment of particular environmental assessment expenses remains a question of fact. However, in the situation at hand, the expenses related to the preparation of an environmental impact statement appear to form part of the cost of obtaining a mining lease which would constitute a Canadian resource property. As such, those expenses should remain classified as CDE.
Reasons: Based upon the provisions of the Act and the relevant provincial legislation as well as the facts of this situation.
October 11, 2000
XXXXXXXXXX TSO Resource Industries Section
XXXXXXXXXX A.A. Cameron
(613) 347-1361
Attention: XXXXXXXXXX
XXXXXXXXXX
2000-004407
XXXXXXXXXX
We are writing further to your request that we clarify the views expressed in our memorandum of March 28, 2000 (the "Opinion") with regard to certain environmental assessment expenses incurred by XXXXXXXXXX.
In particular, you have asked:
i) for our rationale as to why and when, in our opinion, the environmental assessment expenses would satisfy the requirements of the definition of Canadian exploration expense ("CEE") as defined in subsection 66.1(6) of the Income Tax Act (the "Act"); and
ii) whether, if on audit it is accepted that these expenses can be reclassified from Canadian development expense ("CDE"; as defined in subsection 66.2(5) of the Act) to CEE, say in XXXXXXXXXX, these expenses would be subject to further reclassification from CEE to CDE at a later date if these expenses subsequently meet the definition of CDE due to a change in events?
View Expressed in the Opinion
The comments provided in the Opinion, under the heading "Whether environmental assessment expenses are CEE", were as follows:
Environmental assessment expenses have, in recent years, become an essential part in the process of bringing a mine into commercial production. In this case, XXXXXXXXXX may be successful in asserting that some or all of the environmental assessment expenditures satisfy the definition of CEE. As discussed in the context of feasibility studies, satisfying the definition of CEE will depend upon the taxpayer's intention at the time when the expenses were incurred and the nature of the particular expense incurred. XXXXXXXXXX. With respect to the nature of a particular expense, each expense would have to be reviewed to determine whether it was incurred in developing the mine. For example, expenses incurred to determine where to locate tailings ponds, or to determine the impact that blasting would have on the environment would relate to developing the mine, whereas certain other expenses, such as expenses incurred to determine XXXXXXXXXX, or how the property will be reclaimed when the minerals have been exhausted, would not relate to bringing a mine into commercial production.
Based upon our understanding of the facts of XXXXXXXXXX situation as reflected in the Opinion, in order for a particular environmental expense in question to qualify as CEE it would have to meet the tests described in paragraph (g) of the CEE definition. In other words, it would have to be an expense incurred by XXXXXXXXXX "...for the purpose of bringing a new mine in a mineral resource in Canada into production in reasonable commercial quantities and incurred before the coming into production of the new mine...".
It is our understanding that the situation at hand is clearly one regarding expenditures in respect of what would be a "new mine in a mineral resource in Canada" and which has not yet come "into production". As such, the issue becomes whether a particular expense was incurred by XXXXXXXXXX "for the purpose of bringing" such mine "into production in reasonable commercial quantities".
As noted in the Opinion, whether a particular expense satisfies the above purpose test is a question of fact to be determined from all the circumstances relevant to the situation including the intentions of the taxpayer. However, it remains our position that expenses incurred in order to determine whether or not to proceed with a mine would not satisfy this purpose test. In other words, it is our view that expenses incurred by XXXXXXXXXX prior to it having made the decision to bring a mine at XXXXXXXXXX into production in reasonable commercial quantities would not satisfy this purpose test.
Support for this view may be found in the following comments in the decision from the Federal Court - Trial Division in the Oro Del Norte S.A. case (93 DTC 5217 at page 5224) with regard to the provisions of former subparagraph 66.1(6)(a)(iii.1) of the Act:
Expenses included under sp (iii.1), in my view, are those incurred after the preliminary exploration work is concluded and a decision has been made to proceed with a mining project. The expenses are those relating to development of the project "for the purpose of bringing a mineral resource in Canada into production
and incurred prior to the commencement of production from the resource in reasonable commercial quantities". The general introductory words of the subparagraph appear broad enough to include all expenses incurred for the purpose set out, but preliminary exploratory expenses are excluded from sp (iii.1) by their separate definition in sp (iii). Moreover, the examples here included in sp (iii.1), "clearing, removing overburden and stripping" in clause (a) appear to relate to surface mining projects, and "sinking a mine shaft, constructing an adit or other underground entry" in clause (b) appear to relate to underground mining, activities undertaken after a decision to exploit a resource or deposit, using particular methodology, where the resource has been established. Expenses incurred for these purposes, "incurred prior to the commencement of production from the resource in reasonable commercial quantities", are Canadian exploration expenses within sp iii.1).
(emphasis added)
In addition, at page 5233 thereof it is indicated, in part, that:
... Earlier, in construing s/p (iii) and s/p (iii.1) I have distinguished those provisions as related to different kinds of expenses, described as exploration and as development expenses respectively, concerned with different phases in the development of a mining project. In my view, the expenditures included under s/p (iii.1) are those incurred in development of a mine after the decision is made, based on feasibility studies, to proceed with a planned, specific project. At that stage the operator has established the resource, in this case a portion of the coal deposit known as the Jewel Seam, which is relied upon to support investment in the project with the expectation of profit. ...
(emphasis added)
The question then becomes what sort of expenses should appropriately be encompassed by the phrase "...for the purpose of bringing a new mine in a mineral resource in Canada into production in reasonable commercial quantities and incurred before the coming into production of the new mine...".
Legislative Intent
An indication of the intention of the legislators can be derived from comments contained in the 1979 Notice of Ways and Means Motion concerning the introduction of subparagraph 66.1(6)(a)(iii.1) of the Act (the forerunner to paragraph (g) to the CEE definition) which referred to "expenses...relating to the development of a new mine". In addition, the Technical Notes issued by the Department of Finance in September of 1985 upon an amendment to the above subparagraph of the Act indicate that the expenses qualifying thereunder are "[m]ining development expenses".
Jurisprudence
Given these comments as to the apparent intension of the legislators, it should then be considered how this provision has been interpreted in the jurisprudence. We are not aware of any jurisprudence which has concerned the interpretation of this purpose test since the reference to a "new mine" was added (such reference being added at the time of the 1985 amendment referred to in the preceding paragraph). However, as noted in the Opinion, in the International Nickel Company of Canada Limited case (69 DTC 5092), the Exchequer Court of Canada considered the meaning to be given the words "development expense" as used in the phrase "...prospecting, exploration and development expenses incurred by it in searching for minerals in Canada" found in former subparagraph 83A(3)(c)(ii) of the Act. At page 5105, the Court found that what Parliament intended with this provision "...was to confine 'development expenses' to those expenses which are incurred at the development stage of mining as understood by people in the mining business..." (emphasis added). The Court then found that "development expenses" within the meaning of that former provision of the Act "...mean those expenses which are incurred in the opening up of an ore body by shafts, drives and subsidiary openings for the various purposes of subsequent mining such as, the valuation of deposits, the estimate of its tonnage and in due course, its extraction" (emphasis added). Such meaning having been formed from the definition, which had been put into evidence, given to "development" in a book entitled Dictionary of Mineral Technology.
In addition, at page 5233 of the decision in the Oro Del Norte case referred to above, it is indicated, in part, that:
The Act provides in s/p (iii.1) for expenses incurred "for the purpose of bringing a mineral resource [in this case a coal deposit] in Canada into production and incurred prior to the commencement of production from the resource [the coal deposit] in reasonable commercial quantities . . . ". In my view, this provision is to be interpreted as it would be understood in the mining industry, for which Parliament included Canadian exploration expense as defined in s/p (iii.1) as a benefit to attract investment in resource production. Within that industry development expenses would be committed only when a reserve has been established that is considered to be likely to produce a satisfactory profit from production as a result of planned investment in a specific project.
(emphasis added)
In addition, as you have noted in the materials submitted, the meaning to be attributed to the words "for the purpose of bringing a mineral resource in Canada into production" found in former subparagraph 66.1(6)(a)(iii.1) of the Act were considered by the Tax Court of Canada in the Teck-Bullmoose Coal Inc. case (97 DTC 792; affirmed by the Federal Court of Appeal; 98 TC 6363). At page 795 of the Tax Court decision it is indicated that:
Although (iii.1) talks of any outlay or expense, it must be an outlay or expense made or incurred for the purpose of bringing the resource into production and should not be extended to include any outlay or expense incurred in connection with the resource or its later production in commercial quantities.
(emphasis added)
The expenses at issue in the Teck-Bullmoose case related to the construction of a road referred to as the "New Road" with it also being indicated at page 795 of the Tax Court decision that:
In order to best be able to determine whether the New Road had as its purpose the bringing of the resource into production, one must look at the relationship which the New Road bore to bringing the resource into production. ...
(emphasis added)
In addition, it was subsequently indicated on that same page, with regard to the meaning to be given the words "for the purpose of bringing" that:
Those words of necessity must mean bringing the resource into being or existence as a mine capable of producing coal.
(emphasis added)
It should also be noted that jurisprudence suggests that expenses may satisfy the purpose test under consideration notwithstanding that the relevant mine is not completed and therefore would never attain "production in reasonable commercial quantities". At page 5231 of the decision from the Federal Court - Trial Division in the Oro Del Norte case referred to above, it is indicated that:
As I have construed s/p (iii.1), insofar as expenses were incurred after October 1980, when CRC started clearing the surface site at No Name Creek for the portals for underground tunnels, for the purpose of bringing a mineral resource into production, they were what I have described as development expenses. ...
Even though the underground mine was not completed as planned and it never commenced commercial production, no argument was directed to the purpose of the expenses incurred in developing the mine, and, in my view, these expenses were incurred for the purpose of bringing a coal deposit into commercial production.
(emphasis added)
Environmental Assessment Costs at Issue
Based upon information provided in the original memorandum prepared by XXXXXXXXXX with regard to this matter, it is our understanding that the environmental assessment expenses in question were incurred by XXXXXXXXXX from XXXXXXXXXX for three reasons:
i) To complete an environmental impact statement.
ii) To estimate the environmental costs related to the project as part of the feasibility study for the mine/mill.
iii) To provide a reference point for future environmental studies.
With regard to the first of these reasons, XXXXXXXXXX also indicated in his memorandum that in order to be able to establish a mine in the Province of XXXXXXXXXX would be required under XXXXXXXXXX of the XXXXXXXXXX Act of that Province to apply to the Minister XXXXXXXXXX thereof for a mining lease which, when issued would, subject to certain conditions including fulfilling and observing legislative requirements concerning environmental control, "...confer upon the lessee the exclusive right to develop, extract, remove..., etc., certain minerals as specified in the lease with regard to the land described therein. It was also indicated in that memorandum that pursuant to XXXXXXXXXX of the provincial XXXXXXXXXX an environmental impact statement would be required to be submitted and accepted before XXXXXXXXXX could be issued the mining lease necessary to conduct mining operations as noted above.
Discussion
The above comments support the view that the legislators intended that the expenses satisfying the "for the purpose of bringing a new mine...into production in reasonable commercial quantities" test (the "Test") would be those "relating to the development" of such a mine. In addition, the jurisprudence referred to above supports the view that the Test should be interpreted from the point of view of a person in the mining industry.
The above comments also suggest that the Courts would not view an expense incurred prior to the decision having been made to proceed with a particular mining project as satisfying the Test. In addition, they also suggest that the fact that the particular mine does not proceed to completion and commercial production will not preclude an expense from satisfying the Test.
Therefore, with regard to the environmental assessment expenses in question, if they were incurred as part of the feasibility study work to determine whether or not to proceed with the relevant mining project, in our view, they would not satisfy the Test. It is also our view that environmental assessment expenses incurred after a decision had been made to proceed with the relevant mining project and which were "directly linked to the creation or acquisition of a capital asset" (see paragraph 5 of Interpretation Bulletin IT-475 as quoted in the Opinion), would represent part of the cost of that asset (or an eligible capital expenditure if such asset was not so created) rather than be included in CEE.
In a similar vein, the requirements under the applicable provincial legislation described above suggest that there is a direct link between the completion of an environmental impact statement and XXXXXXXXXX eligibility for a mining lease, i.e., acceptance of such completed statement by the provincial authorities must occur before a mining lease would be issued to the taxpayer. Such linkage, in our view, would suggest that it would be appropriate to view the costs to complete the environmental impact statement as forming part of the cost of obtaining such mining lease.
It should be noted that paragraph (e) to the definition of CDE encompasses "...the cost to the taxpayer of any property described in paragraph (b)...of the definition 'Canadian resource property' in subsection 66(15) or any right to or interest in such property..." (emphasis added). Paragraph (b) of the above mentioned definition of "Canadian resource property" ("CRP") will, in part, include in the definition of CRP "...any property of the taxpayer that is...any right, license or privilege to...prospect, explore, drill or mine for minerals in a mineral resource in Canada".
It is our understanding that XXXXXXXXXX of the XXXXXXXXXX Act of the Province of XXXXXXXXXX provides, and provided during the period under consideration, in part, as follows:
XXXXXXXXXX
XXXXXXXXXX
As such, upon XXXXXXXXXX delivering the application as required under the provincial legislation quoted above, it would have a right to the issuing of the appropriate mining lease, conditional upon certain specified requirements being met. One such requirement being "..that the lessee fulfils and observes the requirements of all statutes of the province...and regulations, orders and directions made under those statutes..." which would include the requirement under the provincial XXXXXXXXXX referred to above that an environmental impact statement be submitted and accepted. (It was noted in the Opinion that "XXXXXXXXXX").
Given the provisions of XXXXXXXXXX of the XXXXXXXXXX Act of the Province of XXXXXXXXXX quoted above, it is our view that XXXXXXXXXX would have a "right to or interest in" a mining lease which would be encompassed by paragraph (e) of the definition of CDE in subsection 66.2(5) of the Act notwithstanding that an "absolute" right had not arisen, i.e., conditions remained to be fulfilled before the Province would agree to issue the relevant mining lease. Support for this view may be found in the decision of the Tax Court of Canada in the Alberta Energy Company Ltd. case (95 DTC 220) wherein the provisions of former subparagraph 66(15)(c)(vii) [now paragraph (f) of the CRP definition] were considered by the Court. [An appeal of this decision to the Federal Court of Appeal was dismissed (98 DTC 6007).] After indicating at page 223 that the several references to "any" in that provision "...expresses a legislative intent to cast a broad net" and that "[t]he word 'property' defined in subsection 248(1) of the Act is also very broad in scope", it was further noted by Bonner, T.C.C.J. at page 224 that:
I accept the assertion that the Minister was entitled under section 153 of the Mines and Minerals Act, to either refuse to issue an exploration licence or to make any such licence subject to conditions which he might prescribe. I do not accept the argument that the presence of such ministerial discretion leads to a conclusion that the appellant did not have a paragraph 66(15)(c) right.
(emphasis added)
In addition, it was also indicated by Bonner, T.C.C.J. at page 224 that:
Much of the argument advanced on behalf of the appellant seems to rest on the unstated premise that paragraph 66(15)(c) encompasses only unfettered rights to prospect, explore, drill, etc. The context in which rights of the sort described in that provision often arise is described in R. Dussault and L. Borgeat, Administrative Law: A Treatise, 2d ed., vol. 3 (Toronto: Carswell, 1989) at 125:
The Crown is the owner of the public domain and may consent to relinquishing all or some of its rights, so long as the domain is not put in jeopardy through improper development. It is for this reason that most often the agreement between the individual and the public authority allows the latter to determine the norms or standards that will apply. Consequently, the licensee is required to make use of the Crown domain under a system of unilateral decisions made by the Administration within the rather wide framework established by statute.
In my view, any intention to confine paragraph 66(15)(c) rights to absolute rights is most unlikely to be present in the factual context addressed by the legislation. ...
(emphasis added)
XXXXXXXXXX
In a situation where, after consideration of all of the facts and circumstances of that situation, it is ultimately concluded that a taxpayer, having earlier decided to proceed with a particular mining project has abandoned that project it is possible that certain expenses incurred by the taxpayer will satisfy the Test. In this regard, it should be kept in mind that in the jurisprudence referred to above the Courts were not interpreting the purpose test as currently found in paragraph (g) of the definition of CEE, i.e., a test tied to a specific "new mine". The quotations from the decision in the Teck-Bullmoose case presented above suggest that the Courts will not cause the Test to be "...extended to include any outlay or expense incurred in connection with the [new mine]..." but will "...look at the relationship which the [expense in question] bore to bringing the [new mine] into production." With such quotations also suggesting that the phrase "for the purpose of bringing" would be interpreted to mean "...bringing the[new mine] into being or existence as a [new] mine capable of producing..." the mineral in question.
Based upon the factors discussed above, it is our view that in a situation where a taxpayer, having earlier decided to proceed with a particular mining project has abandoned that project, if the taxpayer could demonstrate to the Courts that a particular expense would be viewed by people in the mining industry as one which was necessary to bring a new mine into production, the Courts may conclude, in the absence of another provision of the Act specifically applicable thereto, that such expense satisfied the Test. As noted above, it is also our view that it will remain questions of fact whether a taxpayer has actually decided to proceed, or to abandon, a mining project at a particular point in time.
Given the view expressed above, the second question you have raised concerning the situation where certain expenses have been reclassified from CDE to CEE becomes moot. However, in our view, whether expenses having been so reclassified should be subject to further reclassification upon additional information becoming available is a question which should be determined from an analysis of all of the facts of a particular situation.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.
If we can be of further assistance with regard to this matter, please contact the writer.
John Chan, CA
Manager
Resource Industries Section
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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