23 April 1996 External T.I. 9517055 - 5907(2.1) ADJUSTMENT - DEFERRED STRIPPING COSTS

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:

Foreign affiliate - Are deferred stripping costs related to mining eligible for the adjustment in Regulation 5907(2.1)?

Position:

No.

Reasons:

Stripping costs are not included in the definition of foreign resource property as defined in subsection 66(15) (which refers to the definition of Canadian resource property in the same subsection). They do not fit the definition of capital property in section 54 either. (Plus the wording of the provision seems clear that it is intended to deal with properties, not operating expenses.)

XXXXXXXXXX						951705

Attention: XXXXXXXXXX

April 23, 1996

Dear Sirs:

Re: Subsection 5907(2.1) of the Income Tax Regulations
Mining Industry - Deferred Stripping Costs

We are writing in response to your letter dated June 21, 1995 in which you asked whether subsection 5907(2.1) of the Regulations could apply to deferred stripping costs incurred by a foreign affiliate engaged in mining activities in the United States.

We understand that "deferred stripping costs" is an industry term that is used to describe the mining costs associated with waste rock removal in an open pit mine that are incurred but not immediately charged against earnings for accounting purposes; rather, the costs are accumulated and charged to operating costs pursuant to a formula.

It is our opinion that an adjustment under subsection 5907(2.1) of the Regulations is not available in respect of deferred stripping costs in computing the earnings of the foreign affiliate, as such costs would not be part of the "cost of a ... foreign resource property", within the meaning assigned by paragraph 66(15) of the Act, nor part of the "cost of a capital property" as required by that provision. This would appear to be appropriate as the election is aimed at properties that have value that could be paid out and not at expenses.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch