2011 Ruling 2008-0293011R3 - Exploration Program - CEE

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: Whether the expenses relating to a proposed exploration program will qualify as Canadian exploration expenses under paragraph (f) of the CEE definition, and will not be considered to be related to a mine that has come into production in reasonable commercial quantities or to a potential or actual extension thereof.

Position: Yes.

Reasons: Based on the facts presented and a written opinion received from Natural Resources Canada dated January 19, 2011.

XXXXXXXXXX 						2008-029301

XXXXXXXXXX , 2011

Dear XXXXXXXXXX :

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge receipt of your e-mails as well as the information provided in various telephone conversations.

Throughout this letter, XXXXXXXXXX will be referred to as "the Company".

The Company files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office. The Company is resident in Canada for the purposes of the Act.

You have advised that to the best of your knowledge, and that of the other responsible officers of the Company, none of the issues raised in this ruling request is:

(i) involved in an earlier return of the Company or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Company or a related person;

(iii) under objection by the Company or a related person;

(iv) before the courts; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The Company has represented that the transactions described in this letter will not affect its ability to pay any of its outstanding tax liabilities.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference in this letter to a statutory provision is a reference to the relevant provision of the Act;

(b) "Canadian development expense" or "CDE" has the meaning assigned by subsection 66.2(5);

(c) "Canadian exploration expense" or "CEE" has the meaning assigned by subsection 66.1(6);

(d) "CBCA" means the Canada Business Corporations Act and, where applicable, its predecessor statutes;

(e) "CRA" means the Canada Revenue Agency;

(f) "flow-through share" has the meaning assigned by subsection 66(15);

(g) "mineral resource" has the meaning assigned by subsection 248(1);

(h) "Paragraph" refers to a numbered paragraph in this letter;

(i) "principal-business corporation" has the meaning assigned by subsection 66(15);

(j) "proposed transactions" means the transactions described in Paragraphs 9 through 12 below;

(k) "public corporation" has the meaning assigned by subsection 89(1);

(l) "Stock Exchange" means the XXXXXXXXXX Stock Exchange; and

(m) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

1. The Company is incorporated under the CBCA and is a public corporation, a taxable Canadian corporation, and a principal-business corporation. The Company's year-end is XXXXXXXXXX . The Company's authorized share capital consists of an unlimited number of common shares without par value. At XXXXXXXXXX , the Company had XXXXXXXXXX issued and outstanding common shares that are traded on the Stock Exchange.

2. On XXXXXXXXXX , the Company signed a binding Letter of Agreement with XXXXXXXXXX , to acquire the XXXXXXXXXX (the "Property"). The Property is part of the XXXXXXXXXX . The former XXXXXXXXXX (the "Former Mine") is situated on the Property.

3. XXXXXXXXXX at the Former Mine was discovered in XXXXXXXXXX . The Former Mine operated until XXXXXXXXXX . During its productive life the Former Mine produced an average of XXXXXXXXXX tons per day from a combination of vertical sublevel retreat along with longhole and shrinkage stopes.

4. When the ore production ceased in XXXXXXXXXX , the Former Mine was kept on care and maintenance for XXXXXXXXXX years until late XXXXXXXXXX , when the mine was allowed to flood. After the Former Mine closure the mill processed ore from a nearby mine until it was eventually put on care and maintenance in XXXXXXXXXX .

5. The Company's acquisition of the Property was completed in XXXXXXXXXX and included the mill assets (including the primary crusher, silo and conveyors), a double drum hoist and hoist room, a XXXXXXXXXX m headframe, ore bin, collar house, hoist building, mine dry office complex, and underground mine workings.

6. The Company has engaged in an extensive surface diamond drilling program to evaluate the geological structures along strike and at depth. XXXXXXXXXX . In XXXXXXXXXX , the decision was made to undertake further exploration. In XXXXXXXXXX the Company started the dewatering and rehabilitation of the shaft to provide underground access for diamond drilling and sampling. In XXXXXXXXXX , a new ramp (the "main-ramp") was collared from the surface XXXXXXXXXX of the former shaft. The main-ramp was to connect to the shaft-ramp at the XXXXXXXXXX m level to enable further exploration of the Property at depth.

The main-ramp was driven without the support of any Former Mine workings and surface services. In XXXXXXXXXX the main-ramp was connected to the shaft-ramp providing continuous access from surface to the XXXXXXXXXX m level. The main-ramp is currently being extended and had reached the XXXXXXXXXX level by the end of XXXXXXXXXX . All of this work was done to provide access to establish underground diamond drilling stations from which the diamond drilling could be done with more precision and at a lower cost.

7. The budget for XXXXXXXXXX provides for the main-ramp to be driven to approximately the XXXXXXXXXX m level and there are no plans right now as to how the Company will continue beyond this point. The understanding is that it would most probably be uneconomic to continue to access and transport beyond the XXXXXXXXXX m level using the main-ramp. The Company believes that it will need a new shaft, or if using the existing shaft, it would be necessary to make it larger (the current shaft would support a daily production of approximately XXXXXXXXXX tons per day, while the Company believes that it will need at least XXXXXXXXXX tons per day production to make the mine economic).

8. On XXXXXXXXXX , the Company announced the completion of an initial resource estimate for the Property. The reported resource contains XXXXXXXXXX tons with an average grade of XXXXXXXXXX grams per ton AU for a total of XXXXXXXXXX contained ounces in the inferred category and XXXXXXXXXX tons at XXXXXXXXXX gpt for XXXXXXXXXX contained ounces in the measured and indicated categories.

PROPOSED TRANSACTIONS

9. The Company's exploration program (the "Exploration Program") for the Property consists of two phases:

(i) Exploration at depth around the existing resource.

The deposit at the Former Mine is known to exist to a depth of about XXXXXXXXXX m. The deep drilling portion of the Exploration Program will focus on the unexplored areas of the Property that are below the location of the previous known deposit. Limited additional drilling will be undertaken to upgrade inferred resources to measured and indicated.

(ii) Area exploration elsewhere on the Property.

Several prospective geological formations and XXXXXXXXXX showing have been identified elsewhere on the Property. A total of XXXXXXXXXX m of infill and expansion drilling, both from surface and underground, was completed during XXXXXXXXXX .

10. The Exploration Program is exploring for mineralization in new zones that were unknown at the time the Former Mine was in production. The new zones are separate and distinct from the historical mineral reserve and have no structural connection to the historical Former mine.

11. The Company has not yet determined the development phase of the Property. However, the Company proposes to use either of the following options, ("Option 1" and "Option 2"), to develop the Property. Both Option 1 and Option 2 would have a production capacity that would be almost ten times larger than the capacity of the Former Mine. The Company proposes to mine ore to a depth of XXXXXXXXXX m. The existing shaft and hoist arrangement could not achieve the intended production capacity at a depth of XXXXXXXXXX m. Both options will require a new headframe, hoist and hoist room. Therefore, the existing headframe, hoist and hoist room will be dismantled. Option 1 will involve the decommissioning of the old shaft and the sinking of a new shaft. The new shaft would be more than four times deeper than the old shaft. Option 1 would result in a larger, deeper and more productive shaft capable of hoisting efficiently the ore from the deepest levels at the required rate. Option 2 will require the decomissioning of the existing shaft and the creation of a new circular shaft.

12. While existing surface facilities (e.g. the mill, shops and offices) may be used as support for the development phase, they will not be an integrated part of the physical activity of blasting, mucking and hoisting ore to surface. Under either Option 1 or Option 2, the Company proposes to use new workings (i.e. shaft, ventilation raises, ramps and stopes), equipment and personnel to develop the Property.

PURPOSE OF THE PROPOSED TRANSACTIONS

13. The Former Mine has been closed since XXXXXXXXXX . The purpose of the Exploration Program is not to increase the resource of an operating mine but rather is being undertaken at the site of the Former Mine to determine the existence, extent and quality of additional resources, outside the known mineral deposit. The new zones are separate and distinct from the historical mineral reserve and have no structural connection to the Former Mine.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our Ruling is as follows:

A. An expense incurred by the Company in respect of the proposed Exploration Program, which is incurred for the purpose of determining the existence, location, extent or quality of a mineral resource on the Property including any expense incurred in the course of:

(i) prospecting,

(ii) carrying out geological, geophysical or geochemical surveys,

(iii) drilling by rotary, diamond, percussion or other methods, or

(iv) trenching, digging test pits and preliminary sampling,

but not including any Canadian development expense, will qualify as a Canadian exploration expense of the Company pursuant to paragraph (f) of the definition thereof in subsection 66.1(6) provided:

(a) the expense does not constitute the cost, or any part of the cost, to the Company of any depreciable property; and

(b) the expense is incurred before a mine comes into production in reasonable commercial quantities in respect of any mineralization that may be found on the Property pursuant to the proposed Exploration Program.

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on the Canada Revenue Agency with respect to the expenses of the Exploration Program that are incurred on or before XXXXXXXXXX .

This ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.

COMMENTS

1. Nothing in this ruling should be construed as implying that the Canada Revenue Agency has reviewed, accepted or has made any determination in respect of:

(a) the determination of the fair market value or adjusted cost base of any particular asset, or the paid-up capital in respect of any shares referred to herein;

(b) whether any particular expense incurred by the Company in respect of the Exploration Program, will qualify as Canadian exploration expense of the Company. For example, it is our view that expenses that are incurred in order to determine the economic feasibility of whether or not to proceed with the development of a new mine, or that are related to the processing or sale of the mined mineral, do not satisfy the purpose test of paragraph (f) of the definition of CEE;

(c) where the Company does not use Option 1 or Option 2, as described in the Proposed Transactions, to develop the Property, whether the expenses incurred by the Company in respect of the Exploration Program will qualify as Canadian exploration expense of the Company;

(d) whether the Company is a principal-business corporation and whether any shares issued by the Company are flow-through shares; and

(e) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.

Yours truly,

XXXXXXXXXX
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch