9 June 1980 Income Tax Severed Letter 5-5019 - [Definition of "CEDOE"]

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.

Energy Mines and Resources Canada Petroleum Incentives Administration Ottawa, Ontario K1A 0E4 P. Clement 593-6201

Attention: Kevin Collins Special Advisory Rulings

Dear Sirs:

Re: Definition of "CEDOE"

This is in reply to your letter dated April 22, 1983, requesting our opinion on the meaning of certain expressions and the structure used in the definition of "Canadian exploration and development overhead expense" ('CEDOE") in subsection 1206(1) of the Income Tax Regulations. We understand that under the Petroleum Incentive Program (Federal PIP) Regulations, CEDOE is not eligible for incentives.

You have requested our opinion on the following aspects of the definition:

1) whether the phrase "Canadian exploration and development activities" in paragraph (b) of the definition has a narrow meaning, and excludes indirect expenditures, or whether it night include activities other than Canadian Exploration Expense (CEE) and Canadian Development Expense (CDE), such as Canadian Oil and Gas Property Expenses (COGPE) where such expenses could also be considered as having been directed towards those activities;

2) whether each of paragraphs (a), (b) and (c) is independent of the other paragraphs. The example you gave was where a person's salary qualified as CEE or CDE but more than 10% of that salary was in respect of administration (i.e. CEDOE by virtue of paragraph (a)). The question is whether the balance of the salary might still be eligible for PIP incentives and would not be considered ineligible by virtue of paragraph (b), or whether the entire salary is CEDOE by virtue of paragraph (a).

3) whether the term "administration" refers to activities above the "operating" level or whether it includes clerical and secretarial functions; and

4) whether the term "management" includes managing the exploration or development activity.

Our opinion on each of the above areas, is as follows:

1) The expression "Canadian exploration and development activities is not defined in the Regulation, so the words should be interpreted in accordance with their common meaning. In our opinion "exploration and development" activities would not be limited solely to activities which qualify as CEE or CDE, since the definitions of those expenses in sections 66.1 and 66.2 of the Act are restrictive.

2) The fact that more than 10% of a person's salary was CEDOE by virtue of paragraph (a) of the definition should not, by itself, result in the entire salary being considered CEDOE. The "all or substantially all" provision in paragraph (b) refers to the nature of the person's duties during the year while employed by the taxpayer, without regard to the allocation of the total salary expense required by the provisions of the Income Tax Act or Regulations.

3) "Administration" is not defined in the Regulations and reference must be made to the ordinary definitions of the word. The C.I.C.A, text, "Terminology for Accountants", defines the administration expenses of an organization as those "relating to the overall direction of its affairs, as contrasted with expenses incurred for other specialized functions such as manufacturing selling or financing." Black's Law Dictionary defines "administration" as "the performance of the executive duties of an institution (or) business". The salaries of secretaries or clerks in the exploration department of a business would not seem to fall into either of the above definitions.

4) Similarly, in determining what activities constitute management, one should refer to its ordinary meaning. The C.I.C.A. text defines management as "the act of planning, directing and controlling the activities of an organization or project to enable it to reach its goals," or "the persona who are involved in the management of an organization." In this regard, we note that the CEDOE definition refers to the management "of the taxpayer", without distinguishing between "functions" and "personnel". However, the definition uses the words "in respect of" which were discussed in a recent Supreme Court decision (Nowegijick v. the Queen 83 DTC 5041).

The Court stated at page 5045:

The words "in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as "in relation to" "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters."

We would conclude, therefore, that the CEDOE definition could encompass management of the exploration or development activities of the taxpayer, and might include such expenses as the salary of the exploration manager or chief geologist. For example, Black's Law Dictionary defines "management" as "government, control, superintendence, physical or manual handling or guidance; act of managing by direction or regulation or administration", and "manager" as "one who has charge of a corporation and control of its business or of its branch establishments, divisions or departments, and who is vested with a certain amount of direction and independent judgment".

You had stated that the policy of Federal PIP, was to include the management of the "company" but to exclude the management of exploration and development activities from CEDOE. While this may be in accordance with the intention of the legislation, in our view the words may be subject to a broader interpretation by the courts. It is possible that CEDOE will be considered to include all levels of a company's management.

We trust that the above will be of some assistance in the preparation of your proposed bulletin on the subject.

Yours truly,

Chief, Mines Oils and Forest Industries Section Corporate Rulings Directorate

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