Section 66.1

Subsection 66.1(2) - Deduction for certain principal-business corporations

Administrative Policy

S3-F8-C1 - Principal-business Corporations in the Resource Industries

Overview

1.21 Subsection 66.1(2) provides a special rule for computing the amount deductible by certain PBCs [principal business corporations] for a tax year in respect of their cumulative CEE (defined in subsection 66.1(6)). This rule generally limits a PBC's deduction of its CEE for a tax year to the amount of its net income for the year, thus preventing the PBC from creating or increasing a non-capital loss. Subsection 66.1(2) excludes from its application certain PBCs involved with clean energy generation and energy conservation projects which qualify under paragraphs (h) or (i) of the definition of PBC. Subsection 66.1(3) allows these excluded PBCs to deduct their full CEE balances and create or increase non-capital losses.

12 December 2012 External T.I. 2012-0462511E5 - Canadian Resource Property - Sale- CEE

A corporation which disposes of all or substantially all of its Canadian resource property in a transaction that is subject to the successor rules during a taxation year, can claim a deduction for Canadian exploration expense for that that year. Having regard to the requirement that a principal-business corporation can only claim CEE equal to the lesser of the amount incurred or income earned, "the term ‘income' under paragraph 66.1(2)(b) refers to the income of the PBC for the year as determined under section 3" rather than only income from resource activities.

Subsection 66.1(3) - Expenses of other taxpayer

Administrative Policy

S3-F8-C1 - Principal-business Corporations in the Resource Industries

Excluded PBCs

1.21 …Subsection 66.1(2) excludes from its application certain PBCs involved with clean energy generation and energy conservation projects which qualify under paragraphs (h) or (i) of the definition of PBC. Subsection 66.1(3) allows these excluded PBCs to deduct their full CEE balances and create or increase non-capital losses. This is relevant because these excluded PBCs would generally not own Canadian resource property as defined under subsection 66(15). Therefore, after an acquisition of control, the excluded PBCs would not be able to use their cumulative CEE balances. Under subsection 66.1(3), excluded PBCs may create non-capital losses and, after an acquisition of control, will be able to use these losses subject to the restrictions contained in subsection 111(5) and related rules.

Subsection 66.1(6) - Definitions

Canadian exploration expense

Paragraph (a)

Cases

Canada v. McLarty, 2008 DTC 6354, 2008 SCC 26, [2008] 2 S.C.R. 79

limited recourse promissory note

The full purchase price of $100,000 for the acquisition by the taxpayer of seismic data represented Canadian exploration expense to him notwithstanding that $85,000 of the purchase price was satisfied by a promissory note for $85,000 which would be paid down during its term out of a portion of cash proceeds received from any future sales or licensing of technical assets and of production cash flow generated from petroleum rights from drilling programs. The note did not represent a contingent liability because it provided that should any amount be outstanding at maturity, the holder of the note would have recourse to specified security (in such event a trustee was to be appointed to sell seismic data with the proceeds of sale being allocated as 60% in reduction of the remaining amounts owing under the note). Rothstein J. stated (at para. 33):

"The Minister seemed to be saying that if there is risk to the value of the collateral security at maturity, liability is contingent because the creditor may not make full recovery of the total liability. If the Minister were correct, all liability would be contingent."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(e) 181
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) decision making not subordinated to the other/structured arrangement 124

Petro-Canada v. Canada, 2004 DTC 6329, 2004 FCA 158

no plan to use purchased seismic data

The Tax Court had allowed a deduction for only a portion of the purchase price for seismic data purchased by two joint exploration corporations and renounced to the taxpayer on the basis that only a portion of the seismic data had been acquired for the required purpose. Sharlow J.A. accepted the taxpayer's submission that the statutory purpose test could be met by an expenditure that was made for more than one purpose but indicated that here there was no evidence of any use of the remainder of the seismic data, or a plan to use it, in the determination of the existence, location, extent or quality of an accumulation of petroleum or natural gas. Most of the seismic data apparently was to be retained for an indefinite period of time for possible future reference and this did not satisfy the test.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) joint purchase with no separate interests 117
Tax Topics - Income Tax Act - Section 67 107
Tax Topics - General Concepts - Purpose/Intention purpose test satisfied even if multiple purposes 71

Global Communications Ltd. v. Canada, 99 DTC 5377 (FCA)

no exploration use of seismic data by taxapyer

The taxpayer purchased a block of seismic data for $1.8 million cash and a $13.2 million note under which recourse was limited to what was realized by the taxpayer on sales of the data and any Canadian oil and gas leases that the taxpayer held at the time the note came due (either seven or ten years later). That block of data, together with another block, had been sold to an intermediary on the previous day for $2 million in cash and 50% of the net licensing revenue derived by the intermediary over a three-year period.

Robertson J.A. found that none of the purchase price qualified as CEE because the taxpayer had not incurred the expense for the purpose of determining the existence of oil and gas reserves but, rather, for the purpose of offering a product which would enable others to engage in oil and gas exploration. Although there was some minimal use of the data on behalf of the taxpayer for exploration work, there was insufficient evidence to demonstrate that a business was being carried on, i.e., that the data was being used in an organized and systematic manner in the search for oil and gas reserves with a view to a reasonable expectation of profit.

Even if the acquisition had qualified as the cost of CEE, the deduction would have been limited to $1.8 million because (applying section 67) the block of data had a value that was no greater than $1.8 million and, furthermore, the $13.2 million note represented a contingent liability.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 67 33

The Queen v. Gulf Canada Ltd., 92 DTC 6123 (FCA)

no connection betweeen lease payments and exploration

In finding that annual rental or other payments to provincial governments made for the purpose of keeping leases or licences to subsurface oil and gas rights current were not CEE, Hugessen J.A. stated (p. 6128):

"... Payments made to maintain an acreage inventory upon which exploration, development and production may or may not take place at some undetermined time in the future are not within that definition ... [T]here would have to be at least some connection between that expense and the work actually done on the ground ... We are quite satisfied that the purpose of special treatment accorded by the legislation to exploration expenses was to encourage actual exploration and not to finance from public funds the accumulation of huge dormant inventories of subsurface rights."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 124.1 - Subsection 124.1(1) 54
Tax Topics - Statutory Interpretation - Comparison of Provisions presumption that word's meaning is consistent 38

See Also

McLarty v. The Queen, 2005 DTC 217, 2005 TCC 55, rev'd 2006 DTC 6340, 2006 FCA 152, aff'd supra.

rev'd on other grounds, 2006 DTC 6340, 2006 FCA 152, aff'd supra.

The taxpayer purchased an undivided interest in seismic data and related business assets for $100,000 payable, as to $15,000, in cash, and as to the balance by a promissory note the interest and principal on which would be paid, for the first two years, only through the proceeds of sale of licensed copies of the data and from cash flow from a drilling program being conducted by the user of the data and, following two years, out of 60% of proceeds of sale of the data and of petroleum rights acquired pursuant to the drilling program.

The taxpayer's expenditure was $100,000 rather than $15,000 given that the data was required to be sold (so that the promissory note did not represent a contingent liability). Such expenditure qualified as CEE given that the user utilized the data to determine where not to drill and the taxpayer had a reasonable expectation that the data would be used for the purpose of exploration in light inter alia of statements contained in the offering memorandum that had been provided to him.

Administrative Policy

8 December 2015 External T.I. 2015-0616321E5 F - CEE - Severance pay

severance payment not includible in CEE

Would a severance payment made by the taxpayer to an employee who performed services on exploration projects (but whose duties were not all or substantially all directed towards exploration or development activities) be part of the taxpayer’s Canadian exploration and development overhead expenses as per Reg. 1206(1)? Before finding that the payment would not so qualify, CRA stated (TaxInterpretations translation):

Salary costs for time devoted by an employee to functions which are all directed on exploration activities in Canada described in the CEE definition ... would be included as CEE. However, the CRA position is that a severance payment is an expense made by the corporation at the time of cessation of employment and does not constitute an amount paid for services rendered. Consequently, it is not possible to establish a link between the expense and the exploration work carried out. Thus, such a severance payment would not be included in CEE.

93 CPTJ - Q.12

Whether a purchaser is acquiring seismic data for use in its exploration business, so that the cost is CEE or whether the purchaser is acquiring the data for resale, so that it is inventory, is a question that is determined based on the facts and circumstances.

93 CPTJ - Q.11

The tax treatment accorded by a specific section of the Act overrides the accounting treatment given to the transaction.

The salary cost of a geologist who spends all his time working on exploration plays will be treated as CEE rather than as a period expense, irrespective of the accounting treatment.

Paragraph (b)

Cases

Canada v. Resman Holdings Ltd., 2000 DTC 6350 (FCA)

Before going on to find that expenditures incurred in drilling step-out or delineation wells (i.e., wells drilled at the edge of a know pool of oil and gas to further exploit that pool) did not qualify as CEE, Sharlow J.A. stated (at p. 6355) that she accepted:

"the argument of the Crown that the words 'accumulation' and 'gisement' as used in the definition of Canadian exploration expense are intended to convey a meaning that is synonymous with the word 'pool' in the various geological dictionaries referred to above, and that it has the same meaning as 'pool' in the Oil and Gas Conservation Act of Alberta."

Words and Phrases
accumulation

Paragraph (c)

Cases

Edmonton Liquid Gas Ltd. v. The Queen, 84 DTC 6526, [1984] CTC 536 (FCA)

Funds expended in 1974 for the drilling in 1975 of what proved to be a dry hole were nonetheless "incurred" in 1974, because under the 1974 contract with the operator the taxpayer was obligated to pay "the sum of $3,800,000 absolutely and without the possibility of adjustment or refund."

See Also

Wesdome Gold Mines Ltd. v. ARQ, 2016 QCCQ 1504

mine on care and maintenance was a closed mine for CEE purposes

A mining company (“McWatters”) operated its Kiena gold mine, whose primary facilities were situated at Lac de Montigny near Val-d’Or, until October 2002, when it put the mine on care and maintenance (having exhausted the reserves, although there were still measured and indicated resources), and put it up for sale. The Quebec taxpayer (“Wesdome”) acquired the mine in December 2003 in order to obtain access to previously identified targets at its (previously acquired) exploration property to the north through extending an access shaft in the Kiena property. Its exploration program was successful and, after several years, processing activities recommenced at the Kiena facilities.

ARQ assessed on the basis that Wesdome’s related expenditure did not qualify as Canadian exploration expense under s. 395(c) of the Taxation Act (essentially identical to ITA, s. 66.1(6) – Canadian exploration expense – (c)(vi)), as being “any expense that may reasonably be related to a mine in the mineral resource that has come into production in reasonable commercial quantities or to an actual or potential extension of such a mine.” In finding that Wesdome’s expenditures qualified as CEE, Godbout J stated (at paras.72-74, TI translation):

The Court considers an interpretation of the provisions of paragraph 395(c) of the Act that results in the use of mine facilities, placed on “care and maintenance,” in order to carry out exploration work as excluding such work from otherwise-available tax deductions, because there is a continuation of the operation of such facilities, as overly restrictive.

Exploitation eligible for tax deduction is not restricted to that effected from point zero (“from scratch”).

Finding otherwise would be illogical, as the existence of an available mine shaft may be key to accessing a mineralized zone.

The concept of profitability is an integral part of any serious initiative… .

And at paras. 82-86:

The uncontradicted evidence demonstrates that in October 2002, when McWatters ceased operations at the Kiena mine, the identified extractable resources were not of a sufficient quantity and quality to economically justify maintaining operations.

In October 2002, Kiena became a closed mine, pure and simple.

When Wesdome purchased the mine in December 2003, it was not for the purpose of exploiting anew this mine, but only for using the facilities for undertaking exploration work on the mineral properties nearby, which had thereby become more readily accessible.

The Kiena mine thus was closed when Wesdome undertook this exploration work.

This doubtless led to the discovery of an important deposit, but that does not necessarily signify that the subsequent exploitation of that deposit was an actual or potential extension of a mine that had come into production in reasonable commercial quantities.

Farmers Mutual Petroleums Limited v. Minister of National Revenue, 67 DTC 5277, [1967] CTC 396, [1968] S.C.R. 59

An agreement between the taxpayer and its parent corporation was characterized as an agreement to pay for a contractual right to acquire an interest in lands on which exploration and drilling had taken place by paying expenses already incurred by the parent in connection therewith, rather than as an agreement under which the taxpayer itself incurred exploration or drilling costs in respect of lands in which it had an interest. Accordingly, the amounts paid by the taxpayer to its parent did not qualify as "drilling and exploration expenses ... incurred by it on or in respect of exploring or drilling for petroleum or natural gas in Canada" for purposes of s. 83A(3) of the pre-1972 Act.

Administrative Policy

88 CPTJ - Q.1

RC uses parameters of the Energy Resources Conservation Board (Alberta) in determining "new pool" status.

88 CPTJ - Q.18

Although the phrase "any expense" can be interpreted very broadly, the object and spirit of the Act does not allow depreciable property to be characterized as CEE.

88 CPTJ - Q.19

Financing costs may only be included in resource pools pursuant to section 21.

Paragraph (d)

Cases

Canada v. Resman Holdings Ltd., 2000 DTC 6350 (FCA)

Sharlow J.A. found that expenditures incurred on two wells that were dry holes but where, in one case, the drilling rig contract for the wells was assumed by another operator with lease rights to a shallower location and, in the other case, where the respondent used the well as a water disposal well, the evidence fell short of establishing that the wells were abandoned in fact. Sharlow, J.A. also noted (at p. 6356) that "nothing in the Income Tax Act suggests that the question of abandonment of a well depends upon a compliance with provincial regulations".

Administrative Policy

94 C.P.T.J. - Q.14

A well, which is not an exploratory probe, that is drilled for the purpose of determining the existence of petroleum or natural gas and that results in the discovery of a natural accumulation of carbon dioxide in the same taxation year in which the drilling expense is incurred, will not qualify as a discovery well under s.(d), and will not qualify under s.(a) because of the exclusion for "expenses incurred in drilling or completing an oil or gas well".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.11) 21

93 C.P.T.J. - Q.26

Where a well that originally was drilled in 1988 is re-entered in 1993 and drilled to a deeper zone resulting in the discovery of a new pool, well recompletion costs related to the portion of the well that was drilled in 1993, the portion of the well that had been drilled in 1988 and the level where production was taken prior to discovery of the new reserves, would be considered to be CEE.

90 C.P.T.J. - Q.34

Listing of the more common differences between the ERCB classification system and the definition of CEE.

89 C.P.T.J. - Q.18

The definitions used in the Act do not coincide with the parameters used by the ERCB for classifying wells, which are advance estimates rather than being based on the actual facts. However, ERCB parameters are used in determining "new pool" status.

89 C.P.T.J. - Q.17

It is the status of the well that determines whether the expenses are classified as CEE or CDE, and not the intent of the expenses. RC does not administratively allow the splitting up of costs of a single well between CEE and CDE.

Paragraph (e)

Administrative Policy

11 January 2005 Internal T.I. 2004-010434 -

The word "taxpayer" in subsection 66.1(9) and in paragraph (e) of the definition of CEE should be interpreted as referring only to a partner of a partnership and not to the partnership, whereas in order to determine whether a partnership has incurred expenses referred to in paragraphs (a) to (e) of the definition of CDE in its fiscal period, the word "taxpayer" in the preamble of the definition and in paragraphs (a) to (e) of the definition should be read as referring to the partnership.

Paragraph (f)

Cases

Canada v. Phénix, 2001 DTC 5367 (FCA)

Expenditures that would otherwise qualify as the cost of depreciable property were found to qualify as CEE.

See Also

Mickleborough v. The Queen, 99 DTC 47 (TCC)

Various expenses incurred in connection with the operation and supply of a pilot mill that was used in a bulk sampling operation qualified as CEE until the date that the mining company concluded (or should have concluded) that the deposit would not show the grade required to make a production decision. Accordingly, expenses renounced by the mining company to the taxpayer did not qualify as CEE.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Agency - Agency 62

Administrative Policy

2016 Ruling 2015-0614081R3 - Flow through shares - farm-out agreement

exploration under farm-in not integrated with existing mine workings
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 B, 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.

It is not expected that any new mine resulting from the exploration work at Properties 1, 2 and 4 will use the workings at the previous abandoned mines and would instead be operated independently. (There had not been a mine on Property 2.)

The expenditures to be renounced to a flow-through share investor will not include any amount incurred before in the case of Properties 1 and 2, the date an interest in such Properties is acquired by Bco and, in the case of Properties 3 and 4, the date that the applicable Farm-in Agreement has been executed.

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

Including re qualification of expenditures under CEE – (f).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 66 - Subsection 66(12.71) U.S. public corporation can issue flow-through shares for CEE performed under a farm-in agreement with a Canadian sub 368

2017 Ruling 2016-0635341R3 - Canadian Exploration Expenses - New Mine

drilling on an existing, currently uneconomic, mine site qualified as CEE
History of mine

Some time previously, production ceased at the mine site and the mill was removed. After the property had changed hands a number of times, it was acquired by ACo, which recommenced limited production, but then ceased production as the projected grade was not achieved, and ACo put the property on care and maintenance, but continued exploration work, with the focus on near-surface targets that were outside the mine footprint – but then also drilled from an underground platform. This work generated a resource in the indicated and inferred categories.

Company acquisition

The Company then acquired an interest in the property including the exploration are outside the mine footprint. The underground workings had been allowed to flood and other historic shafts had been sealed. The existing tracks would be unusable without significant work. The Company has recently initiated engineering studies to determine the amount of capital required to get the complex up and running again.

PEA

The Company’s exploration on the property has focused both on expanding and upgrading existing resources related to the footprint of the old mine, as well as seeking new resources outside the known resource area. None of the identified resources can be classified as reserves. The Company completed a Preliminary Economic Assessment (“PEA”), which envisioned an underground mining operation relying heavily on the existing milling and tailings management infrastructure, and with primary access via an existing adit or shaft located a specified distance from the existing mill. The results of the PEA warrant additional exploration to expand the potentially mineable resource by converting inferred resources to measured and indicated. Substantial additional exploration and evaluation would need to be performed in relation to the mineral resource in order to reach the stage where a decision could be made to proceed with development of the mine.

Proposed transactions

The Company will undertake an exploration and mineral evaluation program to expand the resource. The mineralization was not commercially mined out when ACo ceased production will be expanded by drilling known mineralization to depth and along strike, as well as by exploring for targets that are believed to exist within the historic workings. In addition, the Company will explore outside the footprint.

Ruling

Re the expenses of the proposed program qualifying under s. 66.1(6) – CEE - para. (f).

16 June 2017 External T.I. 2016-0674541E5 - Mineral Certification

exploring a placer jade deposit did not qualify as CEE

The Minister of Natural Resources advised CRA that nephrite (a type of jade) to be extracted from the in-situ deposits on the subject property was an industrial mineral contained in non-bedded deposits – but excluding placer nephrite deposits, which were considered to not qualify as “a mineral deposit in respect of which...the principal mineral extracted is an industrial mineral contained in a non-bedded deposit.” CRA itself considered that the placer nephrite deposits did not qualify as a “base or precious metal deposit.”

CRA also noted that the exploration expenses in question might be incurred near existing mines, in which case they could be excluded under subpara. (f)(vi).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Mineral Resource placer jade deposit did not qualify as a non-bedded deposit of industrial mineral or as a base or precious metal deposit 88

2016 Ruling 2016-0639671R3 - Exploration expenses as CEE

drilling from an abandoned mine qualified
Background

2014-0534121R3 confirmed that an abandoned mine within the Corporation’s Concession had lost its characteristics as a mine in a mineral resource for the purpose of subpara. (f)(vi) of the CEE definition. The Corporation then issued flow-through shares, to finance preliminary work (which perhaps consisted mostly of analyzing data from drill holes that were previously drilled by previous owners of the mine and from drill core assays left by them, in order to develop an indicated and inferred resource). In order to produce from its Concession in the future, the Corporation needs to develop a new mine by constructing its own workings.

Proposed exploration program

In order to conduct an underground exploration program, the Corporation will lease space in an abandoned mine within the Concession, set up temporary equipment and facilities there and conduct a drilling program, which will be financed with the proceeds of flow-through shares.. No pre-feasibility study has been conducted yet on the deposit being explored.

Ruling

Re the specified expenses of the exploration program qualifying under para. (f).

24 January 2017 Internal T.I. 2016-0675902I7 - Canadian exploration expense

qualifying environmental studies, community consultations and feasibility studies
Voir 2016-0675901I7 pour la version française.

CRA revised its guidelines, summarized below, to reflect the amendment of para. (f) respecting community consultation and environmental study expenses incurred by mining companies at the exploration stage after February 2015. CRA generally will consider the expenses of the following types of environmental studies, community consultations and feasibility studies incurred by mining companies at the exploration stage for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada, to qualify as Canadian exploration expenses (“CEE”), subject to a review of the particular facts:

  • Environmental assessments or community consultations undertaken to meet a legal or informal requirement to obtain a permit or to meet a requirement thereunder – but not (e.g., for community consultations) where undertaken prior to a decision to explore.)
  • Environmental sampling/monitoring in relation to an exploration activity or targeted environmental assessments (e.g., vegetation, fisheries and water assessments) conducted in conjunction with a specific exploration activity – but not general baseline environmental assessments undertaken prior to carrying out a specific exploration activity.
  • Negotiation to secure surface access for exploration purposes or with the local community to secure certainty with respect to exploration operations.
  • Planning for, and studies relating to, the conduct of the exploration; or physical and chemical assessments related to a deposit re deciding to continue the exploration at the site or to assessing the potential for a commercial deposit – but not preliminary planning prior to a decision to explore, or assessments of mine development options or profitability of developing the deposit into a mine.

2015 Ruling 2014-0534121R3 - Canadian Exploration Expenses - New Mine

exploration program on site of abandoned mine
History

A former producing mine in the Concession, which was the only workings capable of producing ore, has since been abandoned and is inactive. Surface facilities were dismantled and removed, and the underground workings were flooded and permanent concrete caps were installed sealing all shafts. The Corporation completed an initial public offering and acquired an interest in the property.

Exploration program

The Corporation will undertake a gold exploration and mineral evaluation program, and will conduct an evaluation of the mineral resource in the Concession in order to determine the extent and quality of the mineral resource. In order to further determine or to estimate further the extent and quality of the XX and other ore zones in the Concession, the Corporation will utilize the data from drill holes that were previously drilled by previous owners of the mine and from drill core assays. The results at each stage will determine the next steps, including the appropriate drilling program to undertake on the Concession, such as confirmation drilling, a diamond drill program on surrounding areas of the XX, and metallurgical testing on future drill holes.

Ruling

The XX will not be a mine in a mineral resource that has come into production in reasonable commercial quantities for the purpose of subparagraph (f)(vi) of the definition "Canadian exploration expense."

2012 Ruling 2011-0422761R3 - Canadian Exploration Expenses

A principal business corporation ("C Co.") plans to engage in an extensive surface exploration program to evaluate several prospective geological fomrations located near an underground mine of C Co. which had been fully shut down and is on care and maintenance. If these new zones were to be developed through underground methods, new workings would need to be contructed. Although certain of the surface facilites at the former mine would be used to support the exploration program, "the surface facilitiews will not be an integrted part of the Exploration Program."

Ruling that expenses of the proposed exploration program will qualify as CEE under para. (f) subject to the various specific statutory exclusions and provided further that any "surface exploration expenses incurred for activities undertaken in the area that is less than X [likely 1.2 km. from the mine shaft per the issue summary] from the Former Mine will not qualify as CEE...."

21 January 2004 External T.I. 2003-004520 -

After an underground mine had been in commercial production, it was placed on care and maintenance, and broken ore and mining equipment were hoisted out of the mine before it was flooded. A proposed underground exploration program would involve de-watering the existing mine shaft and using that shaft to bring in equipment and personnel to carry out underground drilling. If the drilling was successful, the existing shaft would be deepened and utilized to extract the ore, and surface facilities would be reactivated.

The mine had not lost its characteristics of a mine since being closed, so that the underground exploration program related to what was hoped to be a mining operation that would be conducted by way of an extension of the mine. Accordingly, the exploration expenditures would not qualify under (f) or (g).

5 November 2003 Internal T.I. 2003-001803 -

A proposed development program would be considered to constitute an extension of an existing mine (which had gone out of production but had been kept on care and maintenance) given that the ore would be hoisted to the surface using the existing shaft, crusher, loading pocket, hoist and head frame, the miners would access the working faces via the existing shaft and the existing mill and mine offices would be part of the surface infrastructure that would be necessary for the company to carry out the planned operations.

2002 Ruling 2002-016729 -

Proposed exploration that was adjacent to what had been a mine would qualify as CEE (and the area if brought into production would qualify as a new mine for purposes of paragraph (g)) given that the connections between the new area and the old area (including a drift that provided fresh air ventilation) did not have substantial economic utility to the new area.

24 July 2002 External T.I. 2001-013315 -

The costs of a proposed exploration and development program that would target zones that would eventually be accessed by extending the existing underground workings of a mine that had been in commercial production but that was now on care and maintenance (without having been abandoned), would not qualify as CEE.

2001 Ruling 2001-008113 -

Ruling that a proposed mine will be a new mine and that development work, bulk sample testing and drilling to confirm a threshold mineral resource, to assess the commercial suitability of the ore and to establish appropriate mining methods will qualify as CEE within the meaning of paragraph (f).

8 November 1993 T.I. 933205 (C.T.O. "Expenses Prior to Mineral Resource Certification")

Once a mineral deposit is certified pursuant to paragraph (d)(i) of the definition of "mineral resource" in s. 248(1), the deposit will be considered to be a mineral resource for the purposes of determining a taxpayer's CEE, notwithstanding that the expenses may have been incurred prior to the date of certification.

1 March 1991 T.I. 7-4631

"Generally, our position on feasibility studies is that they are too remote from activities undertaken to actually determine the existence, location, extent or quality of a mineral resource in Canada to qualify as CEE under subparagraph 66.1(6)(a)(iii) if they are undertaken to determine whether to proceed with the development of a mine."

Articles

Emmanuel Sala, "Flow-Through Share Financing: Recent Developments, Traps and Tips", 2015 CTF Annual Conference paper

Application of purpose test in (f) (pp. 10:14-17)

Revenue Quebec is of the opinion that expenses that are incidental to exploration work qualify as CEE if, and only if, those expenses are necessary for the performance of the work [f.n.74: ...13-018332-001...March 5, 2014; ...13-016735001...September 20, 2013.] ...

In paragraph 66.1(6)(f) of the ITA ("Canadian exploration expense") and paragraph (c) of section 395 of the QTA, there is no requirement for an expense that is incurred to be essential or compulsory for carrying on the activities of a mining corporation in order for it to constitute a paragraph 66.1 (6)(f) eligible mining CEE. it is sufficient that the expense was incurred for one of the stipulated purposes-- namely, to determine the existence of a mineral resource in Canada, locate such a resource, or determine its extent or quality.

[I]t is well established in the jurisprudence that the purpose or object test in the definition of mining CEE can be satisfied even if the expense is incurred for more than one purpose and that this test only requires a simple connection between the expenses incurred and the actual exploration work or, failing that, a credible plan showing the taxpayer's intention of carrying out such work [f.n. 78: Petro-Canada...2004 FCA 158, para 34 and 35; Gulf Canada...92 DTC 6123 (F.C.A)...; Global Communications...1999 CanLII 8206]. ...

A broad and liberal interpretation is also supported by the definition of overhead expense, where the costs related to administration, management, and financing are implicitly deemed to be mining CEE or mining CDE.

Application of expense denial in (v.1) of (f) of the CEE definition (pp. 10:17-20)

[S]ubparagraph (v.1) of paragraph (f) of the definition of CEE...[e]xcludes certain expenses incurred before a new mine comes into production in reasonable commercial quantities" ("pre-production CEE") that permits income to be earned or that could reasonably permit income to be earned before the mine in question comes into production in reasonable commercial quantities ("pre-production Income"). ...

The Canada Revenue Agency is generally of the opinion that "coming into production" begins on the first day of the 90-day period in which the mill has operated constantly at 60 percent of its theoretical capacity. ...

In...(the "2012 Roundtable"), the CRA had stated that it applied former paragraph 66.1(6)(k.2) of the definition of CEE in the same way as it applies subparagraph 66.1(6)(f)(v.1) of the ITA. In this regard, the CRA released an administrative position on former paragraph (k.2) [f.n. 89: 2006-0210261E5]:

Accordingly, due to the application of paragraph (k.2) of the definition of CEE in subsection 66.1(6), it is only the amount of the expenses incurred by ACO for the sampling operations, net of the income generated from the sale of the gold recovered in those operations, that could qualify as CEE, not the gross amount of such expenses.

It should be noted that technically, even though the income generated from the sale of the gold recovered in the sampling operations is earned by ACO in the taxation year following that in which the expenses related to such operations were incurred, that income would nevertheless be contemplated by paragraph (k.2) and should be considered in determining the net amount of the expenses contemplated by paragraph (f) of the definition of CEE in subsection 66.1(6). [TRANSLATION]

...The use of "that results" instead of "to have resulted" confirms that as of November 6, 2010, the pre-production CEE incurred by the taxpayer in a particular year must be reduced as of the time pre-production Income is earned on the pre-production CEE in question, even if the pre-production Income is earned in a subsequent year. By repealing former paragraph (k.2) and adopting subparagraph (v.1), the legislator has enacted certain elements of the CRA's administrative position on paragraph (K.2). ...

[I]f the aggregate of the pre-production CEE represents $150 and the pre-production Income to which it relates is $100, why should the taxpayer's CEE be reduced by $100? The wording of subparagraph (v.1) is not unclear, and it addresses the disqualification of the expense if the pre-production income exceeds the pre-production CEE to which it can be tied. Nowhere is it stated that the pre-production Income must reduce the pre-production CEE. Conversely, if the aggregate of the pre-production CEE represents $100, and the pre-production Income is $150, why should the taxpayer's CEE be reduced by $150? Should if not instead be reduced by $100?

Subparagraph (v.1) states is that the term CEE excludes pre-production CEE that results in the earning of pre-production income or that could reasonably result in the earning of such income. Therefore, it is only the pre-production CEE that must be excluded from the CEE, not an amount of CEE corresponding to the pre-production Income tied to the pre-production CEE. In addition, pre-production CEE will be excluded as CEE only if a connection can be made between the pre-production income that is earned (or which the mining corporation reasonably expects to earn) and the pre-production CEE. Regardless of when the pre-production Income is earned, that income can have an impact only on the pre-production CEE to which it relates.

Paragraph (g)

Cases

Oro Del Norte S.A. v. The Queen, 93 DTC 5217 (FCTD)

Expenses incurred by members of a joint venture, including the taxpayer, in connection with preliminary planning for an underground mine that was located in the same coal seam as an existing surface mine, and expenses incurred in developing the underground mine, qualified under subparagraphs (iii) and (iii.1). The underground operation was found to be a separate mine from the surface operation in light of such factors as the lack of physical interconnection between the two works, the different anticipated life span for the operations, the lack of interchangeability of the workforces, and the fundamentally different production techniques and safety considerations involved.

MacKay J. also noted that the question of what constituted a "mineral resource" for purposes of subparagraph (iii.1) should be interpreted in light of the industry practice of only committing development expenses when a reserve had been established that was considered to be likely to produce a satisfactory profit from production, and stated (p. 5333) that "resources which lie within the ambit of the reserve to be recoverable by a particular development project ... are the 'mineral resource' or coal deposit intended by s/p(iii.1)".

Words and Phrases
mineral resource

See Also

Teck-Bullmoose Coal Inc. v. The Queen, 97 DTC 792 (TCC), aff'd 98 DTC 6363, Docket: A-949-96 (FCA)

The taxpayer's share of expenditures made by a joint venture to build an improved road linking a proposed coal-mining site to a railroad did not qualify as CEE because the main purpose for the road was to transport coal after it was mined (coal could not have been economically moved on the existing road), rather than to bring materials, men and supplies to the coal-mining site while the mine was being built.

Placer Dome Inc. v. The Queen, 93 DTC 235 (TCC)

An underground mining operation was a new mine rather than an expansion of the open pit mine which lay above it, given that it constituted a separate and a distinct extraction facility. The existence of a number of connecting declines or air raises did not detract from its separate operation.

Administrative Policy

2012 Ruling 2011-0408981R3 - Canadian Exploration Expenses

A mine to be developed close to an existing mine (the C Mine) is ruled to be a new mine within a mineral resource in Canada for purposes of s. (g) of the CEE definition in s. 66.1(6) notwithstanding that a mine access ramp in the C Mine will provide early access to the new deposit, provide diamond drill platforms to access and facilitate exploration, establish initial ventilation for further underground excavation at the new site and provide access to the mining crew for the new mine until its production shaft becomes operational.

2004 Ruling 2004-008972 -

"It is our view that expenses that do not meet the purpose test in paragraph (f) of the definition of Canadian exploration expense 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. Expenses 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 mineral, do not, in our view, satisfy the purpose test in either of paragraph (f) or (g) ... [I]t is our view that those expenses related to the metallurgical tests on the bulk sample to confirm the nil flow sheet and the recovery rate, as well as to the sample that will be sent to potential customers to establish the marketability of the Concentrate are ineligible ..."

2000 Internal T.I. 2000-0044071I7 -

As expenses incurred prior to a decision having been made to proceed with a particular mining project do not satisfy the test in (g), environmental assessment expenses incurred as part of a feasibility study to determine whether or not to proceed with the relevant mining project did not satisfy the test. Furthermore, environmental assessment expenses incurred after a decision had been made to proceed with a relevant mining project and which were incurred in order to obtain a government lease of the property would constitute part of the cost of the lease and, therefore, would constitute CDE under paragraph (e) of the definition thereof in s. 66.2(5).

11 December 2003 External T.I. 2003-004378 -

"The nature and type of expenses contemplated by paragraph (g) of the definition of CEE are mine development expenses incurred after the decision has been made to proceed with mine development. In other words, expenses incurred to determine whether to proceed with the development of a mine would not be encompassed by that paragraph. Where a PBC incurs an expense partly for the purpose described in paragraph (f) to the definition of CEE and partly for the purpose described in paragraph (g) to that definition, the Agency will accept a reasonable allocation of such expenses between those paragraphs as determined from the circumstances of the particular situation."

91 CPTJ - Q.28

Discussion of when pre-production costs will be eligible for inclusion in CEE.

November 1991 Memorandum (Tax Window, No. 12, p. 21, ¶1565)

Re whether a mine is a "new mine".

November 1991 Memorandum (Tax Window, No. 12, p. 16, ¶1569)

Operating losses incurred prior to the beginning of commercial production of a mine may qualify as CEE if they are shown as an asset on the balance sheet.

87 C.R. - Q.47

a placer mine comes into production when full-scale sluicing commences.

Paragraph (g.3)

Administrative Policy

11 October 2017 Internal T.I. 2017-0719181I7 F - Agreement in writing

unresolved ambiguity re whether agreement can refer to a subcontracting agreement

One of the para. (g.3) conditions is that the pre-production mine development expenses were incurred under an agreement entered into before March 21, 2013. Would this requirement be satisfied where a principal-business corporation issued flow-through shares pursuant to a December 31, 2012 flow-through share agreement but incurred the 2013 expenses under the look-back rule pursuant to an agreement which it entered into with a subcontractor in 2013 but after March 21, 2013?

CRA considered it unnecessary to answer this question as, even if the relevant agreement for purposes of the March 21, 2013 cut-off was the subcontracting agreement, the expenses would qualify under para. (g.4) as having been incurred before 2015.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (g.4) pre-production mine development expenses that qualify under CEE – (g.4) need not qualify under (g.3) 243

Paragraph (g.4)

Administrative Policy

11 October 2017 Internal T.I. 2017-0719181I7 F - Agreement in writing

pre-production mine development expenses that qualify under CEE – (g.4) need not qualify under (g.3)

Corporation X, which is a principal-business corporation, issues a flow-through share under a written agreement entered into on December 31, 2012, renounces its Canadian exploration expenses under the look-back rule and enters into a written agreement dated June 20, 2013 with a subcontractor for the incurring of pre-production mine development expenses, with the work (entailing payments of Corporation X of $2 million) ending on December 31, 2013. What date should be considered in determining whether the expenses incurred are CEE or Canadian development expense ("CDE")?

After first noting that as the expenses were incurred after June 20, 2013, they did not qualify as CEE in paragraph (g) of the definition, CRA stated:

[I]f the written agreement described in paragraph (g.3) of the definition of CEE in subsection 66.1(6) is the written agreement (dated December 31, 2012) for the issuance of a flow-through share, the $2 million expense could be considered CEE by virtue of paragraph (g.3) of the definition of CEE in subsection 66.1(6) because the expenses are incurred before 2017. If the written agreement described in paragraph (g.3) of the definition of CEE in subsection 66.1(6) is the written agreement with the subcontractor, 100% of the $2 million expenditure would qualify as a CEE under paragraph (g.4) of the definition of CEE in subsection 66.1(6) because the expenses are incurred before 2015.

Thus, since the expenses in the amount of $2 million were incurred by Corporation X after June 20, 2013 but before 2015 and are eligible pre-production mine development expenses, the expenses paid by Corporation X to the subcontractor are considered to be CEE.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (g.3) unresolved ambiguity re whether agreement can refer to a subcontracting agreement 100

Paragraph (h)

Administrative Policy

16 March 1990 T.I. (August 1990 Access Letter, ¶1374)

The use of a partnership for the purpose of "warehousing" resource expenditures was offensive in policy terms and, accordingly, RC was unwilling to confirm its position that CEE and CDE incurred by the partnership will be considered to be incurred by the partners at the end of the partnership's fiscal period.

22 March 1988 T.I. (August 1990 Access Letter, ¶1374)

CEE and CDE incurred by a partner pursuant to ss.66.1(6)(a)(iv) and 66.2(5)(a)(iv) is treated as being incurred by the partner at the end of the fiscal period of the partnership.

Paragraph (i)

Administrative Policy

86 C.R. - Q.4

RC will not disallow CEE claimed by a partner solely on the basis that the terms and conditions of the partnership units do not comply with the prescribed share rules.

cumulative Canadian exploration expense

Element G

Administrative Policy

12 January 2015 External T.I. 2014-0555071E5 - POD subject to earn-out

proceeds of wind turbine development project

In an arm's length sale, the corporate "Vendor" disposes of the "Property" (including land options agreements, permits, engineering data and technical and environmental reports) acquired in the development phase of a proposed wind turbine farm. The proceeds allocated to the Property's disposition will be deducted from the Vendor's cumulative Canadian exploration expense ("cumulative CEE") pool, and any remaining proceeds will be considered to relate to goodwill. CRA stated:

Paragraph (g.1) of the definition "Canadian exploration expense" in subsection 66.1(6) … includes CRCE. Since the Vendor will dispose of the Property, the cost of which was originally eligible as CEE, the amount that becomes receivable to the Vendor will be subject to the provisions of paragraph 66(12.1)(a) and will reduce the Vendor's cumulative CEE balance under element "G" of the definition under subsection 66.1(6). The negative pool balance will be included in income under subsection 59(3.2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(g) proceeds of goodwill on sale of wind turbine development project 193
Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Cumulative Eligible Capital proceeds of goodwill on sale of wind turbine development project 225
Tax Topics - Income Tax Regulations - Regulation 1219 - Subsection 1219(1) wind turbine development project 102

Element J

Administrative Policy

89 C.P.T.J. - Q19

An amount will be entitled to be received on the date provided for in the applicable senate legislation. For example, an amount will be entitled to be received under the CEDIP on the date borne by the Notice of Entitlement issued by the Department of Energy, Mines and Resources following approval of the application by the Minister.

88 C.P.T.J. - Q2

It is RC's practice to allow taxpayers to increase their CCEE/CCDE by assistance (e.g., PIP or CEDIP) in the subsequent year when the assistance becomes repayable. The reasoning is that until such a time as it is determined that the assistance is repayable there is no legal amount that is payable.

88 C.P.T.J. - Q4

Only royalty relief that takes the form of a direct royalty reduction (for example, as a credit or as a direct payment received) will reduce the taxpayer's CCEE.

Subsection 66.1(9) - Canadian development expenses for preceding years

Administrative Policy

11 January 2005 Internal T.I. 2004-010434 -

"... paragraph (f) of the definition of CDE (which allocates the partner's share of CDE incurred by the partnership) does not contain any wording which changes the character of the expenses from the original character, i.e., the original character being expenses referred to in paragraphs (a) to (e) of the definition of CDE. Therefore, an expense that is described in subparagraph (a)(ii) of the definition of CDE that was incurred by a partnership would also be characterized as CDE under the same subparagraph in computing the CDE of the partners. Consequently, the requirement in paragraph 66.1(9)(f) of the Act that the CDE be described in subparagraph (a)(ii) of the definition of CDE will be met where the expenses incurred by a partnership in a preceding year are those that are described in that subparagraph and that have been allocated to the partners under paragraph (f) of the definition CDE. ... If the word 'taxpayer' in paragraph (e) of the definition of CEE were read as referring to the partnership, none of the CDE of the partnership that became CEE of the partnership under subsection 66.1(9) of the Act could be allocated to the partners as there is no allocation of the expenses described in paragraph (e) of the definition of CEE to the partners provided for in paragraph (h) of the definition of CEE. ... It is our opinion, based on the overall scheme of the relevant resource provisions that the word 'taxpayer' in subsection 66.1(9) of the Act and in paragraph (e) of the definition of CEE should be interpreted as referring only to a partner of a partnership and not to the partnership."