9 July 2004 External T.I. 2004-0083231E5 - income inclusion for prospectors

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 amount to be included in income of prospector should be 50% of the proceeds received on the sale of the shares.

Position: no

Reasons: among other things, such treatment assumes that any gain on the sale of the shares will be a capital gain which is not necessarily the case

XXXXXXXXXX
2004-008323
T. Harris
(613) 957-2114
July 9, 2004

Dear XXXXXXXXXX:

Re: Income Inclusion for Prospectors

This is in response to your letter of June 16, 2004 wherein you requested our interpretation of the provisions of section 35 of the Income Tax Act (the "Act") in the situation where an individual who is a prospector receives shares of a Canadian corporation in exchange for an interest in a Canadian mining property.

In your letter you have proposed the theorem that in all cases the amount to be included in taxable income by a prospector on the sale of shares which were acquired by the individual from a corporation in exchange for an interest in a Canadian mining property would be equal to 50% of the proceeds received on the disposition of such shares. You have included an example to support your theorem and have asked for our views relating to your conclusion.

Our Comments

Subsection 35(1) of the Act applies where an individual who is a prospector acquires shares of a corporation in exchange for the disposition to the corporation of an interest in a right, licence or privilege to prospect, explore, drill or mine for minerals in a mineral resource in Canada, or Canadian real property the principal value of which depends upon its mineral resource content where such property was acquired as a result of the individual's efforts as a prospector. In circumstances where subsection 35(1) of the Act is applicable, no amount is required to be included in the individual's income at the time that the shares are acquired and the cost of the shares to the individual is nil. When the individual disposes of the shares there will, in most cases, be the following two distinct income inclusions:

(i) paragraph 35(1)(d) of the Act requires that the individual include in income an amount equal to the lesser of the fair market value of the shares at the time of their acquisition and the fair market value of the shares at the time of their disposition. The individual is then entitled under paragraph 110(1)(d.2) of the Act to a deduction in computing taxable income equal to one-half of the amount which has been included in the individual's income under paragraph 35(1)(d) of the Act; and

(ii) in many cases, the fair market value of the shares at the time of their disposition by the individual will be greater than their fair market value at the time that they were acquired. The gain represented by any such increase in value may be fully includable in income, or may be a capital gain, one half of which is included in income for tax purposes. The amount of such gain will be determined as the proceeds or selling price, net of any selling costs (refer to (c) below), less the amount included in the income of the individual under paragraph 35(1)(d) of the Act (see (i) above). The determination of whether such gain is on income or capital account will depend upon a review of the facts of a particular situation.

In our view, the provisions of the Act described above will not necessarily yield the same result as your proposal to include 50% of the proceeds received on the disposition of the shares in taxable income. The results of applying the provisions of the Act differ from your proposal in the following manner:

(a) as the amount deducted under paragraph 110(1)(d.2) of the Act (as described in (i) above) is a deduction in computing taxable income, rather than net income, there may be an effect on certain other deductions or tax credits which are calculated by reference to net income;

(b) your proposal assumes that any increase in the value of the shares during the period that they are owned by the individual will be a capital gain. As noted previously, there may be situations where the facts of the particular case would indicate that the gain is on income account and, therefore, the full amount of the gain will be included in income under (ii) above; and

(c) your proposal does not take into account any costs related to selling the shares. As the amount to be included in income under paragraph 35(1)(d) of the Act (see (i) above) is based on the fair market value of the shares at a particular time, this amount would not be reduced by any selling costs relating to such disposition. However, as indicated in (ii) above, any selling costs would be deductible in calculating the amount of any gain on the sale of the shares.

We trust that our comments will be of assistance.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch

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