2010 Ruling 2009-0350941R3 - exploration/new mine 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 expenses relating to a certain exploration and development program will qualify for inclusion under paragraph (f) or paragraph (g) to the definition of CEE. Whether a mine which may be established would be a "new mine" for purposes of paragraph (g) to the definition of CEE.

Position: Expenses incurred in respect of the proposed exploration and development program may potentially qualify under paragraph (f) or paragraph (g) to the definition of CEE. A mine to be established in accordance with the pre-feasibility study described herein would be a "new mine" for purposes of paragraph (g) to the definition of CEE.

Reasons: Based upon the facts and a written opinion from Natural Resources Canada.

XXXXXXXXXX 							2009-035094	

XXXXXXXXXX , 2010

Dear. XXXXXXXXXX :

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.

You have advised that to the best of your knowledge and that of the taxpayer above, none of the issues contained herein:

a) is in an earlier return of the taxpayer or a related person;

b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

c) is under objection by the taxpayer or a related person;

d) is before the courts; or

e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Definitions

In this letter, 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 from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision in the Act, and the Income Tax Regulations hereunder are referred to as the "Regulations";

b) "Canadian development expense" has the meaning assigned to that expression by subsection 66.2(5);

c) "Canadian exploration expense" ("CEE") has the meaning assigned to that expression under subsection 66.1(6);

d) "Canadian resource property" has the meaning assigned by subsection 66(15);

e) "Corporation" means XXXXXXXXXX .;

f) "Deposit" means the XXXXXXXXXX deposit which based upon a XXXXXXXXXX pre-feasibility study, contains open pittable XXXXXXXXXX

g) "depreciable property" includes properties described in Schedule II of the Regulations.

h) "flow-through share" has the meaning assigned under subsection 66(15) ;

i) "former Mine Property" means the former XXXXXXXXXX mine, an open pit and underground mining operation, XXXXXXXXXX

j) "mineral resource" has the meaning assigned under subsection 248(1);

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

l) "prescribed Canadian exploration and development overhead expense" has the meaning assigned under subsection 1206(4.2) of the Regulations;

m) "principal-business corporation" has the meaning assigned under subsection 66(15);

n) "Property" means the XXXXXXXXXX property which the Corporation acquired on XXXXXXXXXX , by executing a Purchase Agreement with XXXXXXXXXX ("Pco") to acquire the assets constituting the Property. The Property is located on the XXXXXXXXXX

o) "taxable Canadian corporation" has the meaning assigned under subsection 89(1);and

p) XXXXXXXXXX

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

Facts

1. The Corporation is a taxable Canadian corporation and a public corporation. The Corporation is a principal-business corporation. Its tax account number is XXXXXXXXXX . It files its annual income tax return at the XXXXXXXXXX Taxation Center and deals with the XXXXXXXXXX Tax Services Office. The fiscal period of the Corporation ends on XXXXXXXXXX The Corporation's address is:

XXXXXXXXXX

2. The Corporation was incorporated on XXXXXXXXXX to acquire the Property.

3. The authorized share capital of the Corporation consists of an unlimited number of common shares, without par value. The common shares of the Corporation are listed on the XXXXXXXXXX under the ticker symbol "XXXXXXXXXX " and are widely held by the public.

4. The primary business operations of the Corporation are to advance the development of the Property.

5. The Property is located in the XXXXXXXXXX

6. The Property is comprised of XXXXXXXXXX claims with an aggregate area of XXXXXXXXXX hectares (ha) owned by the Corporation, except for XXXXXXXXXX claims comprising XXXXXXXXXX ha that are part of a XXXXXXXXXX joint venture between the Corporation and XXXXXXXXXX .

7. The Property includes the site of the former Mine Property. XXXXXXXXXX

8. The majority of past exploration and mine development activity on the former Mine Property had been carried out by XXXXXXXXXX ("Aco"), XXXXXXXXXX ("Bco"), XXXXXXXXXX ("Cco") and Pco.

9. In XXXXXXXXXX , Aco commenced exploration activities on the former Mine Property and achieved immediate success XXXXXXXXXX

10. In XXXXXXXXXX , a major exploration drilling program was undertaken by Aco, including the completion of over XXXXXXXXXX metres of surface drilling, construction of a decline to the XXXXXXXXXX -metre level and underground drilling and sampling along this level. The results of this work successfully confirmed the presence of a significant XXXXXXXXXX deposit.

11. Between XXXXXXXXXX and XXXXXXXXXX , Bco completed additional surface and underground drilling for a total of XXXXXXXXXX metres in XXXXXXXXXX holes. In XXXXXXXXXX , a decision was taken to commence open pit mining at a rate of XXXXXXXXXX tonnes per day and gradually replace this with underground production over a XXXXXXXXXX -year time period.

12. In XXXXXXXXXX , underground mining commenced, coinciding with a merger between Bco, XXXXXXXXXX ., to become Cco.

13. From XXXXXXXXXX to XXXXXXXXXX , underground production was approximately XXXXXXXXXX tonnes XXXXXXXXXX The above total was attained through a combination of mining methods including longhole stoping, cut and fill stoping, shrinkage stoping and level development.

14. In XXXXXXXXXX , due to XXXXXXXXXX declining economics, Cco halted underground mining and reclamation of the former Mine Property was initiated. The reclamation was substantially completed, with a portion of the remaining tailings dam as the major closure item left to be completed. Since that time, the underground workings have become filled with water. The old open pit has also become filled with water.

15. There was no mining activity on the Property between XXXXXXXXXX and XXXXXXXXXX . All existing facilities XXXXXXXXXX were removed from the site. All that remains on the site is the tailings facility.

16. Pco recommenced exploration in and around the former Mine Property in XXXXXXXXXX , almost XXXXXXXXXX years after the mining operations were halted by Cco.

17. From XXXXXXXXXX to XXXXXXXXXX , Pco drilled XXXXXXXXXX holes (XXXXXXXXXX metres) directed towards a variety of exploration targets located XXXXXXXXXX of the former open pit mine, XXXXXXXXXX .

18. The Corporation completed the acquisition of the Property from Pco on XXXXXXXXXX in consideration for XXXXXXXXXX shares of the Corporation and $XXXXXXXXXX cash. Pco was renamed XXXXXXXXXX as part of a plan of arrangement under section 193 of the Business Corporations Act XXXXXXXXXX that was completed on XXXXXXXXXX . The Corporation and XXXXXXXXXX were combined on XXXXXXXXXX . The combination was effected by way of a triangular amalgamation involving XXXXXXXXXX , which was a wholly owned subsidiary of the Corporation, and XXXXXXXXXX to form a new corporation ("AMALCO"), followed by a voluntary dissolution of AMALCO pursuant to XXXXXXXXXX .

19. The Corporation started drilling on the Property in XXXXXXXXXX . As of XXXXXXXXXX , a total of XXXXXXXXXX metres in XXXXXXXXXX holes have been completed on the Deposit. Along with the delineation drilling, XXXXXXXXXX metres of reconnaissance drilling was completed in XXXXXXXXXX testing XXXXXXXXXX of the former Bco open pit and XXXXXXXXXX of the XXXXXXXXXX area.

20. The Corporation announced the results of its pre-feasibility study on XXXXXXXXXX . The pre-feasibility study database included drilling data from the programs predating the Property ownership, and also the Corporation's XXXXXXXXXX drilling campaigns up to the cut-off date of XXXXXXXXXX . It includes a total of XXXXXXXXXX metres of drilling in XXXXXXXXXX holes, including XXXXXXXXXX metres from the Property. The pre-feasibility study indicated positive results.

Proposed Transactions

21. The Corporation is proposing a 2-stage process for the development of the Property consisting of the completion of a feasibility study and a project implementation stage.

22. The Corporation proposes to work towards the completion of a feasibility study on the Property by XXXXXXXXXX at which point an Engineering, Procurement, and Construction Management contract will be awarded. The Corporation proposes to conduct exploration activities that will include drilling of the Deposit. An additional XXXXXXXXXX metres of drilling is expected to be completed in XXXXXXXXXX in support of the feasibility study, which could positively impact the mineral reserves and thus provide additional flexibility to the mine plan. The purpose of the drilling is to further delineate the XXXXXXXXXX resource. More specifically, the Corporation will use the results of the drilling to determine the extent and quality of the XXXXXXXXXX reserve, with the hope of increasing the overall XXXXXXXXXX reserve as well as confirming the grade.

23. Following the completion of the feasibility study and assuming a positive decision, the Corporation proposes to undertake the project implementation stage. This will include the design, procurement, construction and commissioning of the facilities including the power line and main substation, the ore processing installations and the site infrastructure required for the Property. Pre-production mining and related activities, as well as construction of tailings management facilities are also part of the project implementation stage.

24. The proposed open-pit mine will be subdivided into XXXXXXXXXX mining phases, each phase representing XXXXXXXXXX years of mining life. The new design will significantly expand the former Mine Property pit area. Mining will start near the XXXXXXXXXX and move towards the XXXXXXXXXX , and will be deeper than the XXXXXXXXXX . The XXXXXXXXXX mining phases are designed with the objective to mine higher grade material in the early years and to delay the waste stripping in order to maximize the net present value. The proposed open-pit mine will be developed independently from the workings of the previous mines. In particular, the Corporation proposes to hire a new workforce and to acquire new equipment that will be of a different size than the equipment used in the previous mines. Further, the proposed mine will require a new power line, a new camp for the work force and a new mill. The Corporation projects that the production from the proposed open-pit mine will commence in XXXXXXXXXX .

Additional Information

25. Based on a pre-feasibility study, the Corporation has estimated pre-production capital expenditures to be approximately $XXXXXXXXXX . As the property acquired is essentially a clean site, a new supporting infrastructure will be put in place to significantly expand the mine site. The new infrastructure will include:

i. Construction and re-establishment of a new power line with capacity of XXXXXXXXXX kV versus the original line at XXXXXXXXXX kV;

ii. Construction of a XXXXXXXXXX tpd ore processing mill (as compared to a XXXXXXXXXX tpd mill that was utilized by Cco) costing $XXXXXXXXXX plus contingencies;

iii. Construction of new roads to service new buildings and haul routes from the pit to the maintenance truck shop as required; and

iv. Design and construction of exploration camp facilities for approximately XXXXXXXXXX people and other surface facilities which include other supporting infrastructure such as administration buildings, a maintenance warehouse, utilities and site roads.

26. Based on a pre-feasibility study, conventional open pit mining methods will be used to mine the Property, utilizing a fleet size of up to XXXXXXXXXX haul trucks (XXXXXXXXXX tonne), XXXXXXXXXX electric cable shovels (XXXXXXXXXX to XXXXXXXXXX ), XXXXXXXXXX drills and various ancillary equipment to support the mining operation. Approximately XXXXXXXXXX tonnes of lower grade ore will be stockpiled during the first XXXXXXXXXX years of operation and processed at the end of the mine life. The open pit design incorporates XXXXXXXXXX metre high benches with a XXXXXXXXXX metre wide main haul road at a maximum grade of XXXXXXXXXX %. The mine production daily rate, including waste, is estimated at an average of XXXXXXXXXX tonnes per day.

27. The mine development plans include the design and construction of a new tailings facility which will be used in addition to the existing tailings facility. The existing facility has minimal capacity for additional tailings without expanding the size of the dams and is only sufficient for the initial start-up phase of commercial production. To date, the Corporation has not conducted any development at the Deposit site but will be committing to long lead times orders (i.e. for mills and motors) in advance of the feasibility study being completed to take advantage of preferential pricing and shortened delivery times.

Purpose of Proposed Transactions

28. The purpose of the proposed transactions is two-fold. First, the proposed drilling expenditures will be incurred to determine the extent and quality of the XXXXXXXXXX reserve. If a positive decision is made, the Corporation proposes to advance the development of the Deposit. The Corporation wishes to issue flow-through shares to assist in financing the exploration and development activities that will be incurred in order to bring the Deposit into commercial production. The ability to finance with flow-through shares depends upon the qualification of the proposed expenditures as CEE under paragraphs (f) and (g) of the definition of CEE in subsection 66.1(6). This would enable the Corporation to renounce CEE to the flow-through shareholders in accordance with the provisions of subsections 66(12.6) and 66(12.66).

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, Proposed Transactions and the Purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Expenses incurred by the Corporation after the date of this letter, and in respect of the exploration activities described in paragraph 22 of this letter, for the purpose of determining the existence, location, extent or quality of a mineral resource in the Deposit located on the Property, including any expense incurred in the course of:

i. prospecting;

ii. carrying on 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 CEE of the Corporation within the meaning of paragraph (f) of the definition thereof contained in subsection 66.1(6) of the Act,

provided that:

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

(b) the expense is incurred before the mine described in paragraph 24 comes into production in reasonable commercial quantities, and

(c) if the exploration program described in paragraph 22 above culminates in the development of a mining operation, such operation is conducted utilizing the proposed open-pit mine described in paragraph 24.

B. The proposed open-pit mine described in paragraph 24 of this letter will be considered to be a new mine in a mineral resource in Canada, and any expense incurred by the Corporation after the date of this letter, for the purpose of bringing the mine into production in reasonable commercial quantities, and incurred before the new mine comes into production in such quantities will be a CEE of the Corporation within the meaning of paragraph (g) of the definition contained in subsection 66.1(6) of the Act, provided the expense does not constitute the cost, or any part of the cost to the Corporation of any depreciable property or any Canadian resource property.

COMMENTS

Except as expressly stated, these rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly:

(a) the reasonableness of any expenditure referred to in this letter;

(b) whether any particular expense referred to in paragraphs 22 through 24 will qualify as CEE of the Corporation;

It is our view that expenses that do not meet the purpose test in paragraph (f) of the definition of CEE will only be eligible to be included in paragraph (g) of that definition if they are incurred for the purpose of bringing the mine into production in reasonable commercial quantities. In other words, the expenses must be incurred after the decision has been made to proceed with bringing a new mine into production in reasonable commercial quantities. As a result, expenses that are incurred in order to determine the economic feasibility of whether or not to proceed with developing a new mine, or that are related to the processing or sale of the mined mineral do not, in our view, satisfy the purpose test in either of paragraphs (f) or (g) of the definition of CEE;

(c) the determination of the fair market value or adjusted cost base of any property referred to herein;

(d) whether the Corporation is a principal-business corporation;

(e) whether any shares issued by the Corporation as contemplated in paragraph 28 above will be a flow-through share; and

(f) whether any particular expense incurred by the Corporation will constitute a prescribed Canadian exploration and development overhead expense for the purpose of paragraph 66(12.6)(b).

The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 issued by the Canada Revenue Agency ("CRA") on May 17, 2002 and are binding on the CRA provided the Corporation has commenced incurring the expenses described in paragraphs 22 through 24 of the proposed transactions by XXXXXXXXXX . These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Yours truly,

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