Subsection 66(12.67)
Paragraph 66(12.67)(a)
Administrative Policy
2023 Ruling 2023-0961681R3 - CEE Incurred by a Non-resident
A Canadian exploration company (the Company) wholly-owned by a non-resident company (Company B) whose shares are listed, will incur exploration expenses to expand the resource for its Canadian Property so as to potentially bring it back into production, this time at commercial levels of production. It was proposed that Company B would acquire an undivided interest in the Property from the Company for a cash purchase price equal to its fair market value.
The Company would then conduct exploration for its own account and as agent for Company B. The Company’s portion of the exploration expenditures would be financed by its issuing flow-through (common) shares (FTS) to Company B. To fund its exploration work, Company B would issue FTS to Canadian investors, and renounce to them both the CEE directly incurred by it and the CEE renounced to it by the Company.
CRA ruled that:
- Provided that Company B is carrying on a business in Canada, s. 66(12.71) will not apply to prevent Company B from renouncing CEE as per the above.
- Provided Company B and the Company continue to be related at all relevant times, s. 66(12.67)(a) will not apply to prevent Company B from renouncing, to a Canadian investor, CEE that was deemed to be incurred by Company B as a result of the renunciation of CEE by the Company to Company B.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (f) | CEE incurred to expand the resource in order to potentially restart a mine | 429 |
| Tax Topics - Income Tax Act - Section 66 - Subsection 66(12.71) | renunciation by non-resident parent issuing flow-through shares of its CEE and renounced CEE of its Canadian sub re a mine restart project | 260 |
Subsection 66(4) - Foreign exploration and development expenses
Administrative Policy
November 1991 Memorandum (Tax Window, No. 12, p. 14, ¶1563)
Discussion of determination of numerical limit on the amount of the deduction.
88 CPTJ - Q.15
In light of Oceanspan, a U.S. citizen who has invested $1 million in U.S. oil and gas drilling expenses has not incurred any FEDE for purposes of any claims after he has moved to Canada.
Subsection 66(6)
Cases
Wardean Drilling Co. Ltd. v. M.N.R., 78 DTC 6202, [1978] CTC 270 (FCTD)
There was no requirement in s. 83A(8a) of the pre-1972 Act that the acquisition of property entail the acquisition of a business undertaking provided that the property was itself used in carrying on a business.
Where the two assets of a taxpayer used in its gas business comprised a 5% leasehold interest which was the sole source of its revenues, and an interest in 6 Crown leases in respect of which no exploration or development work had been done because it was considered uneconomic to do so, the sale of the 5% leasehold interest constituted the sale of all or substantially all of the property used by it in carrying on its gas business. Assets held by a sub-sidiary corporation were not used in the taxpayer's business.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Evidence | 27 | |
| Tax Topics - Income Tax Act - Section 66 - Subsection 66(15) - Principal-Business Corporation | 65 |
Subsection 66(9)
Administrative Policy
93 C.P.T.J. - Q.26
Where a well, originally drilled in 1988, is re-entered in 1993 and drilling completed to a deeper zone resulting in the discovery of a new pool, 1988 drilling, completion, temporary access road and well site preparation costs, which originally qualified as CDE, will be eligible for reclassification under s. 66.1(9)(f) as CEE.
Subsection 66(10)
Articles
Sanderson, "Joint Exploration Corporations - An Overview", 1994 Canadian Petroleum Tax Journal, Vol. 7, No. 1, p. 53.
Subsection 66(10.1)
Administrative Policy
31 May 1994 External T.I. 9405855 - RENUNCIATION BY JEC OF INTEREST CAPITALIZED TO CEE
Interest paid by a JEC on an interest-bearing loan received from a shareholder corporation in respect of which the JEC has elected under s. 21(2) will be deemed to be CEE that can be flowed-through by the JEC under s. 66(10.1).
93 C.P.T.J. - Q.35
Re effective date of a renouncement.
93 C.P.T.J. - Q.34
Re consequences of an excess renouncement.
93 C.P.T.J. - Q.30
A shareholder corporation need not be a shareholder of the JEC on the date renouncements were made, although it must have been a shareholder of the JEC throughout the period (ending before the end of the JEC's taxation year in respect of which the renouncements were made) during which the resource expenditures were incurred.
92 C.R. - Q.15
CEE that has been renounced to a shareholder corporation by a JEC cannot then be renounced by the shareholder corporation to a third party under the terms of a flow through share agreement.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 66 - Subsection 66(12.6) | 35 |
September 1991 T.I. (Tax Window, No. 9, p. 1, ¶1461)
Where a corporation whose wholly-owned subsidiary previously has incurred CEE causes the subsidiary to renounce the CEE in its favour and it, in turn, renounces the CEE to new or existing shareholders who subscribed for additional share capital, the CEE which previously was incurred by the subsidiary cannot be treated as having been incurred by the corporation for purposes of either s. 66(10.1) or (12.6).
90 C.P.T.J. - Q.9
Because s. 66(10.1)(c) deems a shareholder corporation to have incurred expenses only for purposes of the CEE and cumulative CEE definitions, a subsequent renunciation by a shareholder corporation under either the JEC or flow-through share provisions of CEE renounced to it under s. 66(10.1)(c) is not technically available.
88 C.P.T.J. - Q.6
A JEC is entitled to renounce up to the full amount of its CEE irrespective of the fact that the JEC may have income in a particular year against which to deduct the CEE.
Subsection 66(10.2)
Administrative Policy
93 C.P.T.J - Q. 33
Where during the year while Corporation A is a shareholder, the JEC incurs $1 million of CDE and in December of that year, the JEC sells all its Canadian resource properties for proceeds exceeding the aggregate balance in its CCEE, CCDE and CCOGPE pools, it nonetheless may elect in the beginning of the following year to renounce the $1 million of CDE incurred in the initial year in favour of Corporation A, thereby resulting in an increase in its income under s. 59(3.2)(c).
Subsection 66(11.4) - Change of control
Administrative Policy
S3-F8-C1 - Principal-business Corporations in the Resource Industries
1.23 Subsection 66(11.4) is a deeming rule which applies if:
- a taxpayer is subject to a loss restriction event as defined in subsection 251.2(2);
- the taxpayer, a partnership of which the taxpayer is a majority-interest partner or, after September 12, 2013, a trust of which the taxpayer is a majority-interest beneficiary (as defined in subsection 251.1(3)), has acquired certain Canadian resource property or foreign resource property; and
- the property was acquired within the 12-month period that ended immediately before the loss restriction event.
In such circumstances, subsection 66(11.4) deems the property to have been acquired at the time of the loss restriction event for the purpose of calculating the taxpayer's relevant resource pools other than for the purpose of applying section 66.7. However, this provision would not apply where the taxpayer was a PBC, or would have been a PBC if it were a corporation, immediately before the 12-month period preceding the loss restriction event.
Subsection 66(12.1) - Limitations of Canadian exploration and development expenses
Administrative Policy
93 C.R. - Q. 26, Q. 27
Discussion of RC position on widespread farm-outs, and on typical farm-outs in the mining industry.
12 June 1992 Memorandum (Tax Window, No. 21, p. 10, ¶2023)
General discussion.
92 CPTJ - Q.16
Detailed discussion of RC's policies on farmouts.
5 April 1991 T.I. (Tax Window, No. 3, p. 6, ¶1268)
Unde a widespread farm-out RC will consider the value of the non-contiguous property received by the farmee to be a reimbursement to the farmee for part of its CEE or CDE, with the result that the farmee's CEE or CDE pools will be reduced by that amount.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 54 - Proceeds of Disposition | 66 |
90 C.P.T.J. - Q.2
RC will consider denying its farm-in treatment available under IT-125R3, para. 11 and applying ss.66(12.1)(a) and (b) where a farmee earns an interest in a non-producing property on which it incurred resource expenses, and simultaneously acquires the right to subsequently exchange all of the interest so earned for an interest in an unrelated producing property.
90 C.P.T.J. - Q.3
Consequences of a farmee incurring CEE to earn an interest in a farmor's non-producing resource property where the farmee also receives an interest in depreciable property previously acquired by the farmor.
88 C.P.T.J. - Q.11
ss.66(12.1)(a) or (b) will be applicable under a farm-in where there is production from the acreage in which an interest is being earned.
88 C.R. - Q.21
Where CEE is incurred by a partnership, that expense is also incurred by the partner to which it is allocated.
Subsection 66(12.5) - Unitized oil or gas field in Canada
Administrative Policy
92 C.P.T.J. - Q.1
Re treatment of amounts received by a taxpayer under a unitization agreement in excess of the amounts actually expended by it.
Subsection 66(12.6) - Canadian exploration expenses to flow-through shareholder
Cases
Tusk Exploration Ltd. v. Canada, 2018 FCA 121
In the course of a general discussion, Webb JA stated (at para. 5):
Although subsection 66(12.6) of the ITA only refers to a “corporation”, since only a “principal-business corporation” can issue a flow-through share (as a result of the definition of flow-through share), only a principal-business corporation can renounce CEE under subsection 66(12.6) of the ITA.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 211.91 - Subsection 211.91(1) | Part XII.6 tax was payable on CEE purportedly renounced on a look-back basis to NAL shareholders | 515 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(28) | potential for double taxation under the ITA of NAL transactions | 305 |
| Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(a) | double taxation can result from non-arm’s length transactions such as under s. 69(1) | 301 |
See Also
Hamilton v. The Queen, 97 DTC 787, [1997] 1 CTC 2446 (TCC)
The payment of licence fees of a resource company by the taxpayer on the basis that the corporation would issue flow-through shares to him to reimburse him for the expenditure did not give rise to a deduction to the taxpayer because the corporation did not satisfy the filing requirements of s. 66(12.68).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss | 56 | |
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(m) | 90 |
Administrative Policy
11 October 2013 Roundtable, 2013-0495271C6 F - Flow-through shares and death
An individual who acquired flow-through shares of a principal-business corporation (PBC) on February 1, 2013, entered into a flow-through share agreement in writing, and died on December 30, 213. What deductions and credits would be available in the deceased’s terminal return or to the estate?
[A] renunciation of CEE or CDE by a PBC to a particular person cannot take effect after the death of that person because the particular person ceases to exist at the time of death. In addition, and subject to subsection 66(12.66), a PBC cannot renounce any expenses that it has incurred on or before the date the renunciation takes effect.
For the purposes of the flow-through share regime described in the Act, the estate of a deceased person and the beneficiaries of the estate cannot be considered as the same person as the deceased. The PBC cannot, therefore, renounce CEE or CDE to them in respect of the PBC flow-through shares acquired by the deceased who had entered into an agreement with that PBC for such flow-through shares. As a result, the estate or beneficiaries of the estate will not be entitled to any deduction or credit in respect of the flow-through shares.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 66 - Subsection 66(12.66) | lookback unavailable where taxpayer was deceased on December 31 of look-back year | 199 |
9 August 2012 External T.I. 2012-0455341E5 - CEE/CDE incurred by Subsidiary
Whee a subsidiary principal business corporation issues flow-through shares to its parent (also a principal business corporation) and uses the proceeds to incur qualifying CEE and CDE, the subsidiary may be entitled to renounce those expense to the parent under s. 66(12.6). The parent then would be entitled to renounce those expenses to its flow-thoough share investors, given that the prohibition in s. 66(12.6709A0 against renouncing previously renounced expenses does not apply to related corporations. However, by virtue of s. 66(12.66)(d), the subsidary cannot renounce CEE and CDE to the parent using the "look-back" rule in s. 66(12.66).
92 C.R. - Q.15
CEE that has been renounced to a shareholder corporation by a JEC cannot then be renounced by the shareholder corporation to a third party under the terms of a flow through share agreement.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 66 - Subsection 66(10.1) | 35 |
14 September 89 T.I. (February 1990 Access Letter, ¶1108)
ss.16(12.6), (12.62) and (12.64), when they refer to "agreement" are reiterating the requirement in s. 66(15)(d.1) that the agreement be legally binding in order for expenses to "flow through" to a shareholder. The agreement, therefore, must be written.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Effective Date | 165 |
Articles
Gregory M. Johnson, Wesley R. Novotny, "An Update on Flow-through Shares in the Energy Sector", 2016 Conference Report (Canadian Tax Foundation),12:1-39
No tracing and aggregation of CEE before flow-through share issuance (pp. 12:8)
The PBC is not required to trace the FTS subscription proceeds to the actual payment of the relevant expenses incurred. [f.n. 40 … 9507845 …]. ...
Although no renunciation of a relevant expenditure is permitted unless the PBC actually issues a share or right to a share, nothing prevents a PBC and a FTS subscriber from executing a subscription agreement before any consideration is paid to the PBC or the FTS is issued. This allows the PBC to aggregate the relevant expenditures for renunciation prior to receiving payment for and issuing the FTS. [f.n. 46 … 9604945 …].
Ronald Richler, "Creststreet Income Fund Uses Flow-Through Shares", Corporate Finance, Vol. XI, No. 4, 2004, p. 1124.
Paragraph 66(12.6)(a)
Administrative Policy
21 March 2006 External T.I. 2005-0158451E5 F - Québec Mining Duties Act - Credit for Losses
S. 32 of the Quebec Mining Duties Act (MDA) provided a credit to an operator equal generally to an amount not exceeding 12% of the lesser of (i) its annual loss (excluding the portion thereof attributable to ore processing activities) and (ii) the amount by which the expenses in respect of exploration, mineral deposit evaluation and mine development work, incurred by the operator for the fiscal period in connection with the mining operation, exceeds the amount of government assistance that the operator received or was entitled to receive relating to those expenses.
After finding that this credit was not required to be included in income under s. 12(1)(x.2), CRA went on to state:
[P]aragraph 66(12.6)(a) should not apply to an amount that a corporation has received, is entitled to receive, or may reasonably expect to receive as an RDCL at a particular time, since it would not be reasonable to relate that amount as an RDCL to CEE incurred or to related Canadian exploration activities. That is because the RDCL amount would be too remote from the CEE incurred or related Canadian exploration activities and therefore would not be sufficiently directly related to such CEE and activities to come within paragraph 66(12.6)(a).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - Cumulative Canadian exploration expense - Element J | credit under the Quebec Mining Duties Act based on exploration and development losses of operator was not “assistance" under J | 207 |
| Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x.2) | credit under the Quebec Mining Duties Act based on exploration and development losses of operator was not includible under s. 12(1)(x.2) | 208 |
Articles
Emmanuel Sala, "Flow-Through Share Financing: Recent Developments, Traps and Tips", 2015 CTF Annual Conference paper
Whether reduction for Quebec resource credit (pp. 10:24-25)
A problem arises when mining projects located in the province of Quebec are financed through the issuance of flowthrough shares and non-Quebec investors are involved. A mining corporation involved in such a financing could flirt with the idea that in the event of misqualification of an expense as paragraph 66.1(6)(f) eligible mining CEE, it would only have to substitute, for purposes of the renunciation, an expense in respect of which the Quebec resources credit could have been claimed. In such a situation, however, the CRA could argue that at the time of the renunciation, the corporation could reasonably have expected to receive, at a given time, a Quebec resources credit in respect of the substituted expenditure. ...
Paragraph 127(11.1)(c.2) ITA states that the amount of government assistance in respect of expenses included in the calculation of a taxpayer's flowthrough mining expenditure reduces that expenditure if, at the time of filing his return of income for the year, the taxpayer has received, is entitled to receive or can reasonably be expected to receive the assistance in question.
Paragraph 66(12.6)(a) seems broader to us because the reasonability test it contains is not limited to the time of filing the return of income.
Subsection 66(12.602) - Idem [Amalgamations and mergers]
Administrative Policy
9 January 2004 Memorandum
A principal business corporation would not be prohibited from renouncing $2 million of specified CDE in a particular year comprising $1 million of specified CDE incurred in that year and $1 million of specified CDE incurred in the following year, given that s. 66(12.66) does not deem the expenses incurred in the second year to be incurred on the last day of the preceding year for the purposes of s. 66(12.602)(c). Accordingly, the look-back CDE would be considered to be incurred in 2003 for purposes of the $1 million in s. 66(12.602)(c).
Subsection 66(12.66) - Expenses in the first 60 days of year
Administrative Policy
11 October 2013 Roundtable, 2013-0495271C6 F - Flow-through shares and death
An individual who acquired flow-through shares of a principal-business corporation (PBC) on February 1, 2013, entered into a flow-through share agreement in writing, and died on December 30, 213. What deductions and credits would be available in the deceased’s terminal return or to the estate if the PBC renounced pursuant to s. 66(12.66) all of its Canadian exploration expenses (CEE) on February 15, 2014? CRA first noted that:
[A] renunciation of CEE or CDE by a PBC to a particular person cannot take effect after the death of that person because the particular person ceases to exist at the time of death. In addition, and subject to subsection 66(12.66), a PBC cannot renounce any expenses that it has incurred on or before the date the renunciation takes effect.
Turning to s. 66(12.66), CRA stated:
[O]ne of the conditions for this subsection to apply in order to permit expenses incurred in 2014 to be taken into account is that the renunciation takes effect on December 31, 2013. Consequently, a person who dies before December 31, 2013 cannot benefit from the expenses referred to in subsection 66(12.66) and incurred by a PBC in 2014.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 66 - Subsection 66(12.6) | renunciation must take effect before the death of the deceased and is unavailable to estate | 211 |
13 December 2004 External T.I. 2004-0094991E5 F - Look-Back Rule: Flow-Through Shares
On December 1 of Year 1, Investors subscribed $1,100 for 1000 units of an issuer (“Newco”) each consisting of a Class B common share (qualifying as a flow-through share) at a price of $1.00 and a common share purchase warrant (entitling the holder to subscribe for one Class B common share during the first three months of Year 2 for $0.90) at a price of $0.10. In March of Year 2, Newco (having incurred $1,100 of CEE (or CDE) in that year, renounced $900 of CEE (or CDE) to the investors pursuant to the s. 66(12.66) look-back rule. In Year 3, Newco incurred CEE (or CDE) described in ss. 66(12.66)(b)(i) to (iii) of at least $900, being the proceeds of issuing 1,000 Class B common shares issued on March 1 of Year 2.
After confirming that the s. 66(12.66) look-back rule applied in succession, i.e., CEE (or CDE) incurred in Year 2 could be renounced effective December 31 of Year 1 and $900 of CEE (or CDE) incurred in Year 3 could be renounced effective December 31 of Year 2, CRA went on to confirm its position in 9531266 that:
[T]he exercise of a right to purchase a flow-through share triggers a new flow-through share agreement and … a new "agreement in writing" is not required … . As well … the period referred to in paragraphs (a) and (b) of the definition of "flow-through share" in subsection 66(15) begins on the date of exercise of the right to purchase a flow-through share and ends 24 months after the end of the month that includes that date, unless the original written agreement relating to flow-through shares and share purchase rights (the "original agreement") provides for a shorter period. In such a case, the CRA is of the view that the original agreement should be amended to provide for a different time period, which would allow the issuing corporation a full 24 months to incur CEE or CDE as a result of the exercise of the right to purchase a flow-through share.
28 January 1994 Internal T.I. 9401856 - 60 DAY RULE
Because the definition of "flow-through share" requires that CEE must be incurred during the period commencing with the day of the agreement and ending at the end of the 24th month following the month of the agreement, if an expense is incurred after the 24-month period, the share will not be a "flow-through share". Accordingly, RC could not agree with an interpretation of s. 66(12.66) whereby an expense incurred within 60 days after the end of the 24th month would be eligible for renunciation.
90 C.P.T.J. - Q.13
Discussion of application of rule where a well is abandoned within 90 days after the end of the year.
88 C.R. - Q.23
Description of trust account procedure for meeting the requirement that the consideration be paid before the end of the year.
Subsection 66(12.69) - Filing re partners
Administrative Policy
87 C.R. - Q.30
Revenue Canada will not process an income tax return where form T101A or T102 supplementary does not have an identification number.
Subsection 66(12.7) - Filing re renunciation
Administrative Policy
87 C.R. - Q.29
Discussion of "effective date of renunciation" referred to on form T101.
87 C.R. - Q.31
The renounced expenses do not necessarily have to relate to the property identified on form T101.
Subsection 66(12.71) - Restriction on renunciation
Administrative Policy
2023 Ruling 2023-0961681R3 - CEE Incurred by a Non-resident
A Canadian exploration company (the Company) wholly-owned by a non-resident company (Company B) whose shares are listed, determined that its mine that had produced, but never successfully, could be restarted if it were able to significantly expand the resource so as to potentially support a much higher throughput. It was proposed that Company B would acquire an undivided interest in the Property from the Company for a cash purchase price equal to its fair market value.
The Company would then conduct exploration for its own account and as agent for Company B. The Company’s portion of the exploration expenditures would be financed by its issuing flow-through (common) shares (FTS) to Company B. To fund its exploration work, Company B would issue FTS to Canadian investors, and renounce to them both the CEE directly incurred by it and the CEE renounced to it by the Company. The reason for Company B issuing FTS is that its listed shares may be more attractive to the Canadian investors.
CRA ruled that:
- Provided that Company B is carrying on a business in Canada, s. 66(12.71) will not apply to prevent Company B from renouncing CEE as per the above.
- Provided Company B and the Company continue to be related at all relevant times, s. 66(12.67)(a) will not apply to prevent Company B from renouncing, to a Canadian investor, CEE that was deemed to be incurred by Company B as a result of the renunciation of CEE by the Company to Company B.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (f) | CEE incurred to expand the resource in order to potentially restart a mine | 429 |
| Tax Topics - Income Tax Act - Section 66 - Subsection 66(12.67) - Paragraph 66(12.67)(a) | renunciation by Cdn sub to NR parent of CEE which it in turn renounces on FTS issued by it | 237 |
2016 Ruling 2015-0614081R3 - Flow through shares - farm-out agreement
Background
Bco, a U.S. public company, also is a principal-business corporation as substantially all of its assets are shares and debt of related principal-business corporations. Aco, a wholly-owned Canadian mining and exploration subsidiary, has four “unproven resource properties” (the “Properties”) at a stage such that exploration expenses incurred thereon would still qualify as Canadian exploration expense (“CEE”).
Proposed transactions
- Bco will purchase Aco’s interest in Property 1 and Property 2 (being mining claims) in consideration for the reduction of the intercompany debt owing by Aco to Bco, with Aco including the proceeds of disposition in element F of the definition of “cumulative Canadian development expense.”
- Bco will issue common shares as flow-through shares by private placement or through a public offering by way of prospectus, with the net proceeds used to finance exploration programs on the Properties, including exploration on Properties 1 and 2.
- Aco and Bco will enter into option agreement (the “Farm-in Agreements”) whereunder Aco will grant, on normal commercial terms, exclusive options to acquire undivided working interests in Property 3 or Property 4, as the case may be, based on Bco incurring specified expenditure levels on Property 3 or 4, as the case may be. The working interest in each case will equal the specified expenditures divided by the fair market value of the property (being only mining claims) at the time of option grant. The Farm-in Agreements will be “simple farm-out transaction” as per IT-125R4.
Additional information and purpose
After the renunciations and, in the case of Properties 3 and 4, after Bco has earned its working interests in such Properties pursuant to the Farm-in Agreements, Bco may transfer its interests in one or more Properties to Aco under s. 85(1) (in the case of Property 3 or 4, for a nominal elected amount).
The purpose for having Bco rather than Aco issue the flow-through shares is that the flow-through shares would be publicly listed on the XXXXXXXXXX and would be more attractive to investors. However, it is intended that the flow-through shares will be issued only to residents of Canada.
Rulings
Re qualification of expenditures under CEE – (f) and non-application of s. 245(4), and that s. 66(12.71) will not apply to prevent Bco from renouncing CEE provided that it is carrying on business in Canada.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (f) | exploration under farm-in not integrated with existing mine workings | 481 |
93 C.R. - Q. 24
The fact that the CEE deduction to which a principal business corporation would otherwise be entitled is limited for a particular year, under s. 66.1(2), to the amount of its income for that year will not by itself result in s. 66(12.71) applying.
Subsection 66(12.73) - Reductions in renunciations
See Also
Wallster v. The King, 2022 TCC 124
The taxpayer was renounced Canadian exploration expense (CEE) by an issuer (Quattro) that the Minister subsequently determined had substantially overstated the renounced CEE. Although the Minister gave a notice to Quattro pursuant to s. 66(12.73)(a)(i) requiring it to issue the prescribed form allocating the CEE reduction amongst its flow-through subscribers, Quattro never did so. The Minister reassessed the taxpayer shortly after the expiry of the normal reassessment period to deny the applicable amount of CEE claims of the taxpayer, taking the position that the period for reassessing had been extended by 3 years pursuant to s. 152(4)(b)(v) on the basis that such reassessment was “made as a consequence of a reduction under subsection 66(12.73)” of the purportedly renounced CEE.
Russell J found that the normal reassessment period was not so extended due to such failure of Quattro to allocate the reduced CEE. In this regard, he noted that, in contrast to the prior version of s. 66(12.73), the current version did not explicitly authorize the Minister to reduce the renounced amounts if the issuer failed to do so, and stated (at para. 45) that “[t]here must be finality in the taxation appeal process.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(b) - Subparagraph 152(4)(b)(v) | the failure of an issuer to comply with CRA’s demand to allocate its over-renunciation of CEE precluded extending the normal reassessment period | 239 |
Fagan v. The Queen, 2012 DTC 1139 [at at 3217], 2011 TCC 523
The taxpayer entered into a flow-through share agreement with a corporation ("991") which he and his colleagues had incorporated for the purpose of investing in flow-through shares of an oil and gas company ("Sierra"). After the Minister reassessed the taxpayer to deny the deduction of amounts which 991 had renounced to the taxpayer and which Sierra, in turn, had renounced to 991, the taxpayer argued that the Minister could not reassess the taxpayer because 991 had not been reassessed (the taxpayer had provided a waiver under s. 152(4)(a)(ii) but 991 had not).
Angers J. rejected the taxpayer's argument that the phrase "except for the purposes of that renunciation" in ss. 66(12.61), (12,63) and (12.65) meant that flow-through expenses revert to the corporation once they are challenged by the Minister. He stated (at para. 85):
I would agree with the respondent's position that this phrase pertains to situations involving questions of whether the flow-through corporation has the status of principal business corporation or whether the taxpayer is truly a flow-through shareholder. If what the appellant suggests were actually the case, there would be no need for subsection 66(12.73) of the Act, which says that where a corporation renounces expenses in excess of the amounts it is entitled to renounce, that corporation must inform the Minister so that appropriate adjustments in the expense balances can be made.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(4.01) | 270 |
Administrative Policy
88 C.R. - Q.66
Re the circumstances and method by which RC will require adjustments.
Articles
Gregory M. Johnson, Wesley R. Novotny, "An Update on Flow-through Shares in the Energy Sector", 2016 Conference Report (Canadian Tax Foundation),12:1-39
Indemnity claims of flow-through shareholder generally disappear on CCAA compromise (pp. 12:27)
[I]n National Bank of Canada v. Merit Energy Ltd., [f.n. 101 2001 ABQB 583]… the court held that the FTS indemnity claim was an equity claim. ... [f.n. 102 aff’d 2002 ABCA 5]. … In EarthFirst Canada Inc. (Re), [f.n. 103 2009 ABQB 316]… the court confirmed… in Merit Energy. …
On the basis of these authorities and the amended CCAA, it appears that any FTS holders' claims that arise pursuant to an indemnity provided by a PBC in an FTS subscription agreement will be treated as equity for CCAA purposes. As a result, those claims will rank after debt claims in respect of the PBC... .
Subsection 66(12.731)
Administrative Policy
23 December 2020 External T.I. 2020-0874621E5 - Administration of Draft Legislation-FTS Extension
COVID-related proposed amendments (principally ss. 66(12.6001), 66(12.731) and 211.91(2.1)) released on December 16, 2020 generally relating to a one-year extension of the timelines to spend flow-through share proceeds and make related filings. Should taxpayers file their returns based on such “Proposed Amendments”? For example, where flow-through shares were issued under the look-back rule in 2019, can the Form T101C (reporting any Part XII.6 taxes payable) be filed before March 2022 rather than March 2021? CRA first noted its previously-stated position:
It is the CRA’s longstanding practice to ask taxpayers to file on the basis of proposed legislation. … However, where proposed legislation results in an increase in benefits … the CRA’s past practice has generally been to wait until the measure has been enacted. …
Generally speaking, the CRA will not reassess if the initial assessment was correct in law. As a result, a taxpayer’s request to amend their tax records to reflect proposed legislation will be denied.
It then stated:
Based on the foregoing, taxpayers may file their tax returns, including any Form T101C, based on the Proposed Amendments.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 211.91 - Subsection 211.91(2.1) | taxpayers can delay flow-through share reporting under the look-back rule in reliance on the CODID-related proposed amendments | 200 |
Subsection 66(14.5) - Penalty for late designation
Administrative Policy
89 C.P.T.J. - Q25
There is no provision for waiver of this penalty and an amended election will not be accepted unless accompanied by payment of the penalty.
Subsection 66(15) - Definitions
Canadian Resource Property
Cases
Markin v. The Queen, 96 DTC 6483, [1996] 3 CTC 212 (FCTD)
The taxpayer's employer granted him and other employees a contractual right to receive an undivided 0.5% of net profits attributable to the interest of the employer in oil and gas properties. Gibson J. found that certain of the elements comprising the computation of net profits might reasonably be regarded as royalties where certain other elements entering into the calculation net profits were not in the nature of royalties. Given that no evidence was before the Court as to what were the actual contributing elements giving rise to the taxpayer's net profits interest on which a payment ultimately was made to him, Gibson J. would have been prepared to conclude that the grant of the net profits interest was in the nature of a royalty, had he not gone on to conclude that the amount ultimately received by the taxpayer was employment income to him.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) | 121 | |
| Tax Topics - Income Tax Act - Section 6 - Subsection 6(3) | 128 |
Alberta and Southern Gas Co. Ltd. v. The Queen, 76 DTC 6362, [1976] CTC 639 (FCTD), aff'd 77 DTC 5244 [1977] CTC 388 (FCA), aff'd 78 DTC 6566, [1978] CTC 780, [1979] 1 S.C.R. 36
The taxpayer paid $4 million to Amoco in consideration of Amoco granting to the taxpayer the exclusive right to take petroleum from certain working interests, provided that this right would cease when the taxpayer received $4 million in cash or the equivalent in petroleum substances, plus interest. This arrangement was held to entail the purchase by the taxpayer of a Canadian resource property rather than a loan, given that "a paramount right to 'take' is predicated upon ownership", and that the taxpayer was required to look exclusively to the petroleum substances for its reimbursement without recourse to Amoco. The extraction of the petroleum by Amoco was done as agent for the taxpayer.
See Also
Alberta Energy Co. Ltd. v. The Queen, 95 DTC 220, [1995] 1 CTC 2111 (TCC), aff'd 98 DTC 6007 (FCA)
With respect to an "Acquisition Agreement" that the taxpayer entered into with the Alberta Crown, Bonner TCJ. found (at p. 224) that:
"As a consequence of the Acquisition Agreement, the appellant was singled out as the possessor of the exclusive right to call on the Minister to accord to it, in respect of any bitumen which it encountered, any rights which the Minister, in the exercise of the discretion vested in him by the Mines and Minerals Act, might decide to issue."
Accordingly, in the view of Bonner TCJ., the taxpayer disposed of "a right to a right" of the sort described in what then was s. 66(15)(c)(ii)(B) when under a "farmout agreement" with Esso Resources Canada Limited, the taxpayer received from Esso the sum of $4.5 million in consideration for "... the right, licence and privilege of earning an interest in oil sands rights ..." pursuant to the Acquisition Agreement. In any event, if the taxpayer had not disposed of a right, it at least had disposed of a "privilege". Accordingly, it had disposed of a Canadian resource property.
In the Court of Appeal, Létourneau J.A. stated that "contrary to what the [taxpayer] contended, what was given to it under the agreement was more than a mere expectancy of acquiring property and also more than a right to negotiate".
Administrative Policy
13 March 2013 Internal T.I. 2013-0480511I7 F - Canadian resource property
A government authority conducted scientific studies, environmental assessments and evaluations before granting an exploration permit to Corporation, and then invoiced the Corporation for the related costs. CRA indicated that such costs were part of the cost of property referred to in s. (b)(ii) of "Canadian resource property" in s. 66(15), and were described in para. (e) of the definition of CDE in s. 66.2(5).
7 January 2013 External T.I. 2012-0460791E5 - Qualified Farm Property & Oil Reserves
In response to a question "as to whether a taxpayer whose farm property meets the definition as a "qualified farm property"... within the meaning of subsection 110.6(1)...will be eligible to claim the capital gains deduction under subsection 110.6(2) on a subsequent disposition of the farm property in circumstances where petroleum or natural gas reserves are discovered on the property," CRA responded:
any real property the principal value of which depends on its petroleum, natural gas or related hydrocarbon content will constitute a "Canadian resource property"....For these purposes "principal" means more than 50%. Where the taxpayer owns one right that includes both the surface right and the subsurface right, and more than 50% of the value of the real property depends on the petroleum or natural gas reserves, the right would constitute a Canadian resource property and the disposition of the right would result in the tax consequences described in the previous paragraph [i.e., income inclusion under ss. 66.2(1) and 59(3.2)(c), if a negative CCDE balance arises]. Consequently... the proceeds received from the disposition of the right will not give rise to a capital gain such that the capital gains deduction under subsection 110.6(2) will not be available, as the amount determined under paragraph 110.6(2)(d)...in respect of that disposition would be nil.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 110.6 - Subsection 110.6(2) | 234 |
2 December 2003 External T.I. 2003-004860A - CRP - Rentals and Royalties
In response to the expressed concern that the proposed amendment requiring that the proposed 90% test (quoted below) might require that the "rental or royalty" be paid from a segregated source of funds that originates solely from the proceeds of production of the particular well, accumulation, or mineral resource, CCRA stated:
The determination of whether a particular rental or royalty satisfies the requirement in the amendments, that "90% or more of the rental or royalty is payable out of, or from the proceeds of" the relevant production, will be a question of fact. In determining whether that requirement is satisfied, the Agency would look to the terms of the rental/royalty agreement between the payer and the payee. Consequently, we are of the view that the above-mentioned amendments to paragraphs (d) and (e) to the definition of "Canadian resource property" would not necessarily require that the proceeds of production from a particular well, accumulation or mineral resource be segregated.
Income Tax Technical News, No. 10, 11 July 1997: "Net Profits Interests and Proposed Section 18.1"
Discussion of the circumstances in which the inclusion of non-production sources of income in a net profits interest will cause it to not qualify as a Canadian resource property. It would accept that an NPI is CRP if
the conditions of the NPI provide that 90% or more of the total payments for each year under the NPI will relate directly to the amount or value of the NPI grantor's production during that year from [qualifying resource properties] from which the NPI was granted and, in addition, the remaining payments will be connected to the operation of the above resource property from which the NPI was granted.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account | 0 |
21 August 1995 External T.I. 9514935 - CANADIAN RESOURCE PROPERTY
"'Real Property' generally refers to land and rights issuing out of, annexed to and exercisable within or about land ... . '[M]ineral resource content' refers to the mineral resource that is situated in or derived from the real property."
94 CPTJ - Q. 21 (941034)
Once it is determined that a particular net profits interest does not qualify as a Canadian resource property (in this context, because of a right to share in non-production sources of income, e.g., proceeds from the sale of depreciables), no portion of the net profits interest will qualify as a Canadian resource property.
88 CPTJ - Q.16
A net profits interest entitling the holder to share in the net proceeds of production and sale of oil or gas is a Canadian resource property by virtue of s. 66(15)(c)(iv).
Articles
Randy S. Morphy, Kim Maguire, "An Update on the Taxation of Farm-outs", Resource Sector Taxation, Vol. IX, No. 3, 2013, p. 661.
Farm-out coupled with transfer for consideration (p. 664)
CRA Document 2011-0420451E5(F) (November 22, 2011) is a recent external technical interpretation in which the CRA considered another situation involving a farm-out as part of a larger overall transaction. Specifically, the CRA was asked to comment on a situation where the owner of (presumably unproven) resource properties agreed to grant to a corporate purchaser an option to acquire an interest in the properties. In return, the purchaser agreed to make a cash payment to acquire the option and to perform exploration work on the properties and make further cash payments to preserve the option… .
Option should qualify as resource property (pp. 664-5)
The CRA provided comments [in 2011-0420451E5(F)] based on two alternative assumptions, the first being that the option qualifies as Canadian resource property (as defined in subsection 66(15)) and the second being that the option does not so qualify. this was a curious approach given that it ought to have been a simple exercise to conclude that the option qualified under both the current and proposed definitions of Canadian resource property at the time of the interpretation. The current definition included a "right to or interest in" either a working interest or a fee simple interest in a resource property; the proposed definition (now in force) included a "right to or interest in" a working interest and an "interest in" (but not a "right to") a fee simple interest. An option to acquire real property is both a "right to" that property under a plain reading of that term and an "interest in" that property as per the decision in Frobisher Limited v. Canadian Pipelines & Petroleum Limiter et al. [fn 11: (2959), 21 DLR (2d) 497 (S.C.C.) at 169-70, although we note that in the particular case, the Court found that the option was rendered void and of no effect because of a regulatory prohibition. The CRA seems to generally accept this proposition: see CRA Document 2012-048002117 (April 9, 2013).] If the resource property subject to the option qualifies as a Canadian resource property (and presumably it would), [fn 12: A mineral property would qualify under paragraph (b) (any right, licence or privilege to prospect, explore drill or mine for minerals) in the case of a working interest and under paragraph (g) (any real property the principal value of which depends on mineral resource content) in the case of a fee simple interest. Query whether a fee simple interest would also qualify under paragraph (b), given the rights of a fee simple owner would seem to include the rights described therein.] then the option should also qualify….
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 66.2 - Subsection 66.2(5) - cumulative Canadian development expense - Element F | 324 |
Randy S. Morphy, Richard Eisenhorn, "The Taxation of Royalties Excluded from the Resource Property Regime", Resource Sector Taxation, Vol. IX, No. 1, 2012, p.618
The amended version of para. (d) partly codifies the CRA's previous position (in Income Tax Technical News. No. 10), as to when a net profits interest will be a Canadian resource property (p. 621), and Canpar Holdings Ltd. v. Saskatchewan (Minister of Energy and Mines) "supports the view that the NPI holder does not need to have an 'interest in land'...." (p. 619)
Extensive discussion of the tax treatment of a royalty interest which does not qualify as a Canadian resource property.
Allgood, "Athabasca Oil Sands Trust: Tax Implications of Royalty Trust", Corporate Finance, Vol. V, No. 1, p. 348: Includes reference to a ruling that a net royalty in the production of synthetic crude oil was a Canadian resource property.
Fryers, "'Net Serve! One to Come!' (The Net Profits Interest in the Oil and Gas Industry - An In-Depth Analysis)", 1988 Canadian Petroleum Tax Journal, Spring 1988, p. 121: It is concluded that a net profits interest is a Canadian resource property by virtue of s. 66(15)(c)(iv).
Paragraph (d)
Administrative Policy
7 June 2017 CPTS Roundtable, 2017-0695131C6
Does the reference in para. (d) of the Canadian resource property ("CRP") definition, in its application to a rent or royalty, to the payer thereof having an "interest in" the well or accumulation require a real property interest, or is a contractual interest sufficient? CRA responded:
An “interest” in the well or accumulation … requires that the payer must have a right to take production from the well or accumulation. For example, a farmee who drilled a well pursuant to a farm-out agreement generally has an interest in the well. Also, a lessee under a Crown lease has a right to take production from the accumulation and is considered to have an interest in the accumulation. Of course, the conditions in paragraph (d) of the [CRP] definition … must be met … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Proceeds of Disposition | Q.1 - Daishowa extends beyond reforestation and reclamation obligations only on a case-by-case basis | 213 |
| Tax Topics - Treaties - Income Tax Conventions - Article 13 | Q.3 - Canada-U.K. Treaty does not exempt shares deriving their value from Canadian oil and gas licences – even where the Canadian business is carried on “in” them | 193 |
| Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(ii) | Q.4 - by analogy to mining, hydrocarbons may be similar properties | 348 |
| Tax Topics - Income Tax Regulations - Regulation 1101 - Subsection 1101(1) | Q.5 - normal course dispositions of oil and gas properties generally are not of a separate business | 131 |
| Tax Topics - Income Tax Act - Section 4 - Subsection 4(1) | Q.5 - application of Scales test to determining whether there is a separate business | 224 |
| Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 26 | Q.7 - refinery catalysts are Class 26 property | 87 |
| Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 49 | Q.8 - taxpayers generally have the documentary evidence on hand to allocate costs between pipelines and pipeline appendages | 117 |
Flow-Through Share
Cases
Canada v. JES Investments Ltd., 2007 DTC 5608, 2007 FCA 337
An exploration company ("Deena") that entered into an agreement styled as a flow-through share agreement with the taxpayer failed to incur any Canadian exploration and development expenses so that its purported renunciation of such expenses was invalid, and then went into receivership. In finding that the shares so issued by Deena were flow-through shares despite these failures, Ryer J.A. stated (at para. 6) "the relevant time to determine whether a share is a flow-through share is the time at which it is issued and the record shows that, at the time the Shares were issued, no breach of the Agreement had been committed by Deena."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Regulation 6202.1 - Subsection 6202.1(1) | 107 |
Administrative Policy
5 September 2014 External T.I. 2014-0534941E5 - Flow-through share ss 66(15) of the Income Tax Act
Does a right to acquire a share of a principal-business corporation qualify as a flow-through share where the share to be acquired under the right will not qualify as a flow-through share? CRA stated:
[P]rovided that the right would otherwise qualify as a flow-through share, the right (other than a prescribed right) would continue to meet the conditions of a flow-through share when it is a right to acquire a share of the capital stock of a principal-business corporation that does not meet the definition of a flow-through share.
28 November 2010 CTF Annual Roundtable, 2010-0384341C6 - Flow-through Shares
Respecting whether CEE can be renounced under a unit flow-through share agreement in respect of the portion of the subscription price allocated to a warrant to acquire a share that is not a flow-through share, CRA stated:
CEE can be renounced only in respect of the portion of the subscription price allocated to a warrant which represents a right to acquire a share that would be a flow-through share [as] pursuant to paragraph (b) of … "flow-through share," the amount of resource expenses that may be renounced under the agreement cannot exceed the amount of consideration received by the corporation for the flow-through share or the right to acquire the flow-through share….
6 September 1994 External T.I. 9419865 - ARE SPECIAL WARRANTS FLOW-THROUGH SHARES?
Special warrants would qualify as flow-through shares due to the reference in the post-amble of the definition of rights to have a share issued.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 49 - Subsection 49(3) | 51 |
6 December 1989 T.I. (May 1990 Access Letter, ¶1218)
Discussion of various issues respecting a public offering of flow-through shares.
Articles
Gregory M. Johnson, Wesley R. Novotny, "An Update on Flow-through Shares in the Energy Sector", 2016 Conference Report (Canadian Tax Foundation),12:1-39
Whether deletion of using look-back rule results in a new agreement rather than the shares being issued pursuant to the actual old flow-through share agreement (p. 12:14)
[In 2006-0212861R3] CRA was asked whether an amendment to an FTS subscription agreement would result in a new agreement and hence restrict the ability of the FTS holders to deduct the renounced expenditures. The ammendment permitted the relevant expenditures to be incurred and renounce under the general rule, insted of under the initially drafted lookback rule. ...The CRA ruled that the proposed amendment did not result in a new subscription agreement and that the FTS holder would be able to deduct the renounced amounts under the amended general rule timelines.
Emmanuel Sala, "Flow-Through Share Financing: Recent Developments, Traps and Tips", 2015 CTF Annual Conference paper
Assimilation of warrants to flow-through shares (pp. 10:22-23)
Issuers have been able to treat warrants as flowthrough shares without worrying about a potential contestation by the CRA since September 5, 2014, when the CRA revised its position in this regard:
In accordance with subsection 66(15) of the Act, provided that the right would otherwise qualify as a flow-through share, the right (other than a prescribed right) would continue to meet the conditions of a flow-through share when it is a right to acquire a share of the capital stock of a principal-business corporation that does not meet the definition of a flow-through share. [f.n. 94: 2014-0534941E5] [EMPHASIS ADDED]
Foreign Exploration and Development Expenses
Administrative Policy
90 C.P.T.J. - Q.36
There is no FEDE incurred by a taxpayer for the purposes of ss.66(15)(e) and 66(4) with respect to U.S. oil and gas drilling expenses incurred by him prior to becoming a resident of Canada.
Joint Exploration Corporation
Administrative Policy
23 June 1992 T.I. 921868 (January - February 1993 Access Letter, p. 20, ¶C56-211)
A principal business corporation that has, throughout its existence, always been a wholly-owned subsidiary of another corporation will qualify as a JEC irrespective of the number of corporations of which it has been such a subsidiary.
5 September 1991 T.I. (Tax Window, No. 9, p. 19, ¶1446)
A principal business corporation will not be disqualified as a JEC solely by virtue of having had, in the aggregate, more than ten shareholders since incorporation, provided that it did not have more than ten shareholders at any particular time.
Original Owner
Administrative Policy
94 C.P.T.J. - Q. 10
A person who has an interest in a partnership does not own a proportion or share of the partnership's property for purposes of s. 66.7, except where s. 66.7(10)(j) applies to deem the partner to have owned the Canadian resource property of the partnership. Thus, the partner will not be an "original owner".
Principal-Business Corporation
Cases
Wardean Drilling Co. Ltd. v. M.N.R., 78 DTC 6202, [1978] CTC 270 (FCTD)
It was indicated, obiter, that s. 83A(8a) of the pre-1972 Act, which referred to a principal business which was a gas business or a mining business, would not apply "where the 'principal business' at the relevant time was a combination of a 'gas business' and a 'mining business' and was neither a 'gas business' nor a 'mining business'."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Evidence | 27 | |
| Tax Topics - Income Tax Act - Section 66 - Subsection 66(6) | 129 |
Alberta and Southern Gas Co. Ltd. v. The Queen, 76 DTC 6362, [1976] CTC 639 (FCTD), aff'd 77 DTC 5244 [1977] CTC 388 (FCA), aff'd 78 DTC 6566, [1978] CTC 780, [1979] 1 S.C.R. 36
The activity of buying natural gas from approximately 100 producers of natural gas and selling that natural gas primarily (but not exclusively) to the taxpayer's American parent constituted "marketing". There was no necessity for the taxpayer to conduct an active campaign to search out purchasers.
M.W.A. Gas and Oil Ltd. v. MNR, 74 DTC 6123, [1974] CTC 140 (FCTD)
The taxpayer, which was incorporated in 1966 to do construction work on a turn-key Ford construction assembly plant, had completed its work by December 1967 with the exception of clean-up work, such as landscaping and the installation of external iron railings, and the negotiation of compensation for work done pursuant to change orders. In October 1968 expenses of $55,000 were incurred by the taxpayer in exploring and drilling for oil, and oil and gas exploration rights were acquired at a cost of $900,000.
The taxpayer's principal business for its fiscal year ended October 31, 1968 was its oil and gas business, notwithstanding that all its profit, and all its employees, for that year, related to its construction business. "In the plaintiff's 1968 taxation year its construction business was in its death throes while the oil and gas business was born and in its dynamic infancy reaching maturity in the succeeding year."
Sogemines Development Co. Ltd. v. MNR, 72 DTC 6254, [1972] CTC 284 (FCTD)
The principal business of the parent of the taxpayer was found not to be mining or exploring for minerals in light of the following facts: its objects were that of an investment business; of its total holdings of over $10 million only $247,000 represented its participation in mining exploration projects (with most of the balance being invested in shares of resource and industrial companies); it had no mining equipment, no office and no payroll; and it had recently described itself in a prospectus as an investment company. Heald J. noted (at p. 6259) that "the Shorter Oxford English Dictionary defined 'principal' as 'the chief, main or most important thing, part, point or element'".
Minister of National Revenue v. Consolidated Mogul Mines Limited, 68 DTC 5284, [1968] CTC 429, [1969] S.C.R. 54
In its 1957 to 1960 taxation years, the taxpayer carried on exploration work on properties in which it had a direct interest. However, its chief task was the development and management of properties owned by other companies in which it usually had a share interest. It generally subscribed for shares in a corporation owning prospects and by contract with the corporation controlled the expenditure of the invested money on exploration.
After noting that s. 83A(3) referred to a company whose "principal business is mining or exploring for minerals" without requiring "that such mining or exploring for minerals should be done within Canada or should be done upon properties in which the taxpayer seeking the deduction has an interest in the property" (p. 5286), Spence, J. went on to find that the taxpayer was engaged in mining and exploring for minerals and that this was its principal business. In response to a submission of the Minister referring to the large investment portfolio held by the taxpayer, he stated (p. 5286):
It may be said generally that although the source of the income of a corporation is an important element to be considered in determining which is its principal business it is not the only matter to be considered and not necessarily the determinant factor.
He quoted with approval the statement made in the Tax Appeal Board that:
[I\t would appear to be reasonable to assume that the multiplicity of arrangements which exist between mining companies and the constant juggling of shareholdings for various necessary purposes is just part and parcel of the mining business. ... Obviously, the financing function of a mining company is an integral part of its business.
See Also
Ethyl Corp. of Canada Ltd. v. The Queen, 80 DTC 6194, [1980] CTC 198 (FCA)
"Petroleum products" are products that are derived from petroleum and accordingly do not include antiknock compound which contains foreign substances.
Administrative Policy
S3-F8-C1 - Principal-business Corporations in the Resource Industries
Meaning of petroleum products in s. 66(15)(a)
1.4 …[P]etroleum products…in paragraph (a) of the PBC definition, includes all steps up to the production and sale of a petroleum product as a raw material… . For example, the fabrication of toys from plastic is not a qualifying operation.
Meaning of drilling (s. 66(15)(a.1))
1.5 Paragraph (a.1)…[includes] all drilling operations even if such operations do not result in producing wells. For example:
- drilling an oil or gas well, building a temporary access road to the well, or preparing the site in respect of the well;
- drilling or converting a well for disposal of waste liquids from a petroleum or natural gas well;
- drilling for water or gas for injection into a petroleum or natural gas formation; and
- drilling or converting a well for the injection of water or gas to assist in the recovery of petroleum or natural gas from another well.
Meaning of mining or exploring (s. 66(15)(b))
1.6 Paragraph (b) of the PBC definition includes all activities necessary in the search for, and examination of, prospective minerals, the development of minerals for mining and the production of ore or minerals from the earth, such as:
- prospecting;
- carrying out geological, geophysical, or geochemical surveys;
- drilling by rotary, diamond, percussion or other methods;
- trenching, digging test pits, and preliminary sampling; and
- clearing, removing overburden, and stripping.
Meaning of Fabrication of Metals (s. 66(15)(e))
1.7 Paragraph (e) of the PBC definition includes operations such as the manufacture of alloys (for example, brass, solder, and stainless steel) and the intermediate or final stages of manufacturing metals such as stamping, forming, machining, welding, cutting, or casting. …
Comparison of resource and non-resource activities
1.11 A…corporation will generally qualify as a PBC if the corporation's activities of the kind described in [s. 66(15)] represent a larger or more important business operation than all other activities of the corporation combined….
1.12 The following are important criteria for making [this] determination…:
- the amount of income derived from each business operation;
- the amount of gross revenue attributable to each business operation;
- the operating costs and expenses of each business operation;
- the capital employed in each business operation; and
- the time and effort expended by the employees on each business operation.
Review of operations over more than a year
1.15 In… determining a corporation's principal business for a particular tax year, only the business operations in that year should be considered. However, in some cases it may be necessary to review the operations of the company over a longer period of time. For example, a mining corporation which has qualified as a PBC for many years might suffer a temporary decline in its mining activity in a particular year due to various problems, such as adverse economic conditions, labour problems, or other short-term difficulties. … [I]n determining whether a corporation qualifies as a PBC for a particular year, regard may be had to a future plan of the corporation to the extent that it is implemented in the year.
Assimilation of management functions
1.16 The management and administrative functions which are necessary to the conduct of the business operations referred to in [s. 66(15)] are considered to be an integral part of those operations.
Ownership not required
1.17 For a corporation to qualify as a PBC, it is not necessary that the corporation perform the qualifying activities described in [s. 66(15)] on its own property.
Participation in partnerships and JVs
1.18 A corporation might be a member of a partnership, joint venture, syndicate or similar association. In such cases, in determining whether the corporation qualifies as a PBC, the business operations carried on by such organizations are regarded as being carried on by the corporation directly, to the extent of the corporation's interest in such organizations.
Non-residents as PBCs
1.19 As the PBC definition only refers to a corporation, not a taxable Canadian corporation, a non-resident corporation can qualify as a PBC provided that it meets all applicable criteria.
11 July 1989 T.I. (Dec. 89 Access Letter, ¶1046)
A Canadian corporation whose only activity was mineral exploration for other corporations on a cost plus basis and which did not own any of the properties on which it worked was a principal - business corporation.
89 C.P.T.J. - Q10
A holding corporation will not be a principal-business corporation by virtue only of the activities of its grandchild subsidiary.
88 CPTJ - Q.8
RC continues to use the 90% rule as a general guideline for assessing.
86 C.R. - Q.6
Whether a corporation involved in resource activities and having investment assets is engaged in the business of investing those assets is a question of fact.
Production
Administrative Policy
10 February 1999 External T.I. 9826855 - PRIME METAL STAGE OR ITS EQUIVALENT
Discussion of what is the "prime metal stage or its equivalent".
Paragraph 66(15)(i)
Administrative Policy
93 C.P.T.J. - Q.31
Where a shareholder invests $100 in shares of a JEC at the beginning of the year, during that year the JEC incurs $1,000 of CDE financed out of operating cash flows, and on December 31 the shareholder makes a payment to the JEC of $1,000 in respect of such CDE as additional share subscription proceeds, the JEC may renounce $1,000 of CDE to the shareholder in respect of that year on January 1 of the immediately following year. In other words, there is no requirement that the shareholder's payment to the JEC be traceable to specific expenses that the JEC subsequently renounces.
89 C.P.T.J. - Q.3
It is not a requirement that a shareholder's payment or loan to a JEC be traceable to specific expenses that the JEC subsequently renounces.