Section 66.2

Subsection 66.2(1)

Administrative Policy

23 March 2018 External T.I. 2018-0739741E5 - Disposition of Freehold Mineral Rights in Canada

example of computation where individual inherited and disposed of CRP

In response to a more general question, CRA constructed the following simple numerical example. Mr X (a resident individual) inherited the Property (an oil and gas property) in 1992, its fair market value was $1 million, and sells the Property (his only Canadian resource property) to an arm’s length third party in 2018 for its FMV of $1.5 million, bearing closing costs of $15,000, and without having claimed any deductions respecting any CRP since 1992. CRA then stated:

When Mr. X died he would have been deemed to have disposed of the Property for proceeds of disposition of $1 million, in accordance with paragraph 70(5.2)(a) and the Taxpayer would have been deemed to have acquired the Property at a cost of $1 million pursuant to paragraph 70(5.2)(b). As noted above, such cost would have been a COGPE to the Taxpayer with the result that the Taxpayer’s CCOGPE balance would have been $1 million immediately after Mr. X’s death. Because the Taxpayer did not claim any deductions in respect of the Property or any other CRP, such CCOGPE balance would have remained at $1 million until the time of the sale of the Property by the Taxpayer.

Upon the sale of the Property by the Taxpayer in 2018, the Taxpayer’s CCOGPE balance will be reduced by $1,485,000 pursuant to element “F” of that definition, which is the difference between the $1.5 million proceeds of disposition and the $15,000 of selling expenses. Assuming there are no other adjustments to the Taxpayer’s CCOGPE balance during 2018, the Taxpayer would have a CCOGPE balance of negative ($485,000) at the end of 2018. This negative amount is deducted from the Taxpayer’s CCDE balance, which, based on the assumptions set out above and assuming there are no other adjustments to the Taxpayer’s CCDE during 2018, will result in the Taxpayer having a negative CCDE balance of ($485,000) at the end of 2018. Therefore, in 2018, the Taxpayer will have an income inclusion of $485,000.

Subsection 66.2(2) - Deduction for cumulative Canadian development expenses

Administrative Policy

23 October 2012 External T.I. 2012-0463841E5 - Cumulative Canadian Development Expenses

In response to a question as to "whether a taxpayer who has disposed of all of its Canadian resource property may deduct any remaining balance in the taxpayer's cumulative Canadian development expense ("CCDE") pool." CRA described the deduction in s. 66.2(2) and stated:

There is no other provision in the Act that would permit a taxpayer to deduct any amount relating to the undeducted balance in its CCDE pool subsequent to the disposition of all of the taxpayer's Canadian resource property. Consequently, the taxpayer will only be entitled to claim a 30% yearly deduction in respect of the balance in the CCDE pool at the end of the taxpayer's taxation year.

Subsection 66.2(5) - Definitions

Canadian development expense

Administrative Policy

7 February 2018 External T.I. 2016-0637221E5 - Rollover of Mineral Rights

cost of property added to CCDE or COGPE

The Taxpayer, which is not in the business of exploration and development of mineral properties, wishes to transfer the Property (which may consist of subsurface rights to explore for qualifying mineral or hydrocarbon resources) on a tax deferred basis to a taxable Canadian corporation in consideration for shares. CRA stated:

If the Taxpayer is not in the business of exploring or developing resource properties and has not acquired the Property for value, we are of the view that the Taxpayer would not have incurred any Canadian development expense (“CDE”) as defined in subsection 66.2(5) and would not have a balance in his cumulative CDE (“CCDE”) as defined in subsection 66.2(5).

However, where the Taxpayer acquired the Property for value and the Property is a CRP under paragraph (a) of the definition, the cost of the CRP would represent a Canadian oil and gas property expense (“COGPE”) of the Taxpayer that would have been added to the Taxpayer’s cumulative COGPE (“CCOGPE”) balance pursuant to element “A” of the definition of that term in subsection 66.4(5). Where the Property is a CRP pursuant to paragraph (b) of the definition, the cost of acquiring the CRP would represent a CDE that would have been added to the Taxpayer’s CCDE pursuant to element “A” of the definition of that term in subsection 66.2(5).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(a) nil amount can be elected 225

Paragraph (a)


St. Ives Resources Ltd. v. The Queen, 92 DTC 6223 (FCTD), briefly aff'd 94 DTC 6261 (FCA)

The taxpayer purchased a Canadian resource property from another corporation for a purchase price of $3.5 million which it satisfied by the giving of an interest-bearing promissory note for that amount. When, several months later, the purchaser made a demand for payment, the taxpayer and the purchaser entered into a "Price Rectification Agreement" pursuant to which the taxpayer granted a promissory note in the amount of $4.75 million to the purchaser in replacement of the previous note. In finding that the additional $1.25 million was not a "preservation cost", Rouleau J. noted that when demand for payment was made, there was no "threat" to the taxpayer's interest in the resource property, and that therefore no action or payment was necessary to preserve the taxpayer's interest.

See Also

Leonard Pipeline Contractors Ltd. v. The Queen, 80 DTC 6236, [1980] CTC 305 (FCA)

Evidence was accepted to the effect "(a) that the term 'development' relates to the drilling of wells in a proven field and (b) that pipeline construction lies outside the field of development". (Excise Tax Act)

Administrative Policy

19 November 2012 External T.I. 2012-0459351E5 - Shale Gas Well Drilling Classification

A shale gas well will generally qualify under subparagraph (a)(ii) of the definition of "oil and gas well" in s. 248(1), and consequently expenses to drill and complete the well, including building temporary access roads and preparing a site in respect of the well, "may" be classified as Canadian development expenses. However, the drilling of the well may qualify instead as Canadian exploration expense "where the drilling of a well results in the discovery that a natural underground reservoir contains petroleum or natural gas, a dry hole, or the well is shut in or abandoned within specified time limits and without having produced." Finally, the drilling may qualify for scientific research and experimental development credits if done for "experimental development of a new technology."

Paragraph (b)

Administrative Policy

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

Where a well that originally was drilled in 1988 is re-entered in 1993 and drilling is completed to a deeper zone, but with no resulting discovery, so that the well is plugged back to the original reservoir, which continues in production, the 1993 drilling costs, the costs to plug the well back up to the point where the 1988 drilling ended and the costs related to recompleting the portion of the well that had been drilled in 1988, are treated as CDE.

Paragraph (c.2)


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

Reclassification of preproduction development expenses (pp. 10:8-9)

The reclassification of preproduction development expenses, historically eligible mining CEE [occurs] pursuant to paragraph (g)... .

...As eligible mining CEE, pre-production development expenses could be either fully deductible when calculating the income of the mining corporation or renounced to investors and fully deducted by those investors. Under the 2013 changes, the costs of such intangible property incurred to bring a new mine to the state where it is producing reasonable commercial quantities-- such as the costs of stripping and removal of the overburden, excavation, the drilling of a mine shaft, and construction of an adit or underground passage, to name just a few-- were transferred from the mining CEE scheme to the mining CDE scheme, which allows only a 30 percent tax reduction calculated on a declining balance.

Paragraph (e)

Administrative Policy

2014 Ruling 2013-0505431R3 - XXXXXXXXXX

transfer of roylaty from partly-owned partnership

underline;">: Existing structure. Pubco, a CBCA public corporation, and Subco, its wholly-owned CBCA corporation, are partners, along with GPCo (also wholly-owned by Pubco), of Partnership D. Partnership D has a royalty which represents an interest in XX% of the net profits from the production from a specified property of two other partnerships (Partnership E and LP) and from other cash flows generated in Partnership E (the "Royalty"). The net profits are computed by reference to XX% of the interest that Partnership E owns in a specified property and by reference to XX% of the interest in LP of Partnership E.

Proposed transactions
  1. All the issued shares of Subco will be exchanged by Pubco under s. 86 for one new common share and one new preferred share.
  2. Pubco will acquire an undivided percentage interest in the Royalty from Partnership D in consideration for the issuance of a demand promissory note (the "Royalty Purchase Note"), with the proceeds being allocated by Partnership D to its partners (Subco and Pubco.)
  3. Subco will transfer its interest in Partnership D and other "Distributed Assets" to a newly-incorporated subsidiary of Pubco (Newco 1) in consideration for redeemable preferred shares of Newco 1 with a price adjustment clause and with a s. 85(1) election made.
  4. Newco 1 will redeem such preferred shares for the Newco 1 Note (also subject to a price adjustment clause), and with a contemporaneous notice that the deemed dividend is an eligible dividend.
  5. Subco will redeem the preferred share issued to Pubco in 1 in consideration for transferring the Newco 1 Note and for issuing a further Note, with a contemporaneous eligible dividend notice.
  6. Newco 1 will then be wound-up into Pubco. Pubco will elect to have s. 80.01(4) apply to the resulting settlement of the Newco 1 Note.
  7. Pubco will transfer its undivided interest in the Royalty to Partnership D as a contribution to its capital, with a s. 97(2) election being made.

The reorganization, by bringing principal revenue sources together in Pubco (which incurs head office and financing costs), will match operating income with related expenses, and will help Pubco to effect an income tax consolidation within Canada and move some of Subco's CCDE balances to it.


Include: Provided that the Royalty is a Canadian resource property, Pubco pursuant to s. 98(2), and (e) of the CDE definition will incur an addition to its CCDE account equal to the fair market value of the interest in the Royalty acquired by it, and the partners of Partnership D (including Pubco) will have their CCDE reduced by their share of the FMV proceeds to Partnership D.

See more detailed summary under s. 55(3)(a).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) public trading in dividend recipient does not engage exclusion in s. 55(2)(a)(iv) 776
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) delay in filing articles of dissolution 47
Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) s. 97(2) applicable to contribution (no equity consideration) 55

22 November 2011 External T.I. 2011-0420451E5 F - Canadian resource property

farm-in policy inapplicable where an option that might not be exercised: CDE addition as cash and exploration expenditures made

Corporation A entered into an option agreement with Corporation B under which it obtained the right to acquire the subject claims (representing unproven resource properties) after paying stipulated sums, issuing shares and performing stipulated work in specified amounts over an 18 month period, and with the right to abandon its option at any time. What are the consequences to it?

CRA indicated that it was not prepared to extend its policy on farm-in arrangements to this situation (given that “carrying out the work on the claims does not give a right in the claims but potentially only an option to acquire them”), stating:

Consequently … the amounts paid to carry out the work on the claims of Corporation B would be added to the cash payments provided for in the agreement and would be considered part of the overall consideration given by Corporation A to acquire a property. The sums paid to carry out the work on the claims of Corporation B would therefore not constitute "Canadian exploration expenses" to Corporation A.

Therefore, assuming that Corporation A actually acquired an option to acquire the claims for the purpose of exploration or development of the claims and assuming the claims were described in paras. (b), (e) or (f) of the definition of "Canadian resource property" in s. 66(15):

[T]he amounts paid by Corporation A to Corporation B or to perform the work would be included in paragraph (e) of the definition "Canadian development expense" in subsection 66.2(5), and element A of the definition "cumulative Canadian development expense" in subsection 66.2(5.

Corporation B should add those amounts to Element F of the definition of "cumulative Canadian development expense" in subsection 66.2(5).

Consequently, taking into account the acquisition of the resource property that occurred at the time of the outlays, Corporation A could continue to deduct the deductible portion of its cumulative Canadian development expense account if it does not exercise the option. On the other hand, taking into account the acquisition of the resource property that took place at the time of the outlays, the exercise of the option would not entail any additional tax consequences to Corporation A or Corporation B.

Paragraph (f)

Administrative Policy

92 C.P.T.J. - Q.3

The election provisions of s. 66.2(5)(a)(iv) and s. 53(1)(e)(vii.1) were added to allow a taxpayer to have an option of capitalizing his share of a partnership's CDE as part of the ACB of his partnership interest.

cumulative Canadian development expense

Element F

See Also

DeLuca v. The Queen, 87 DTC 5202, [1987] 1 CTC 305 (FCTD), aff'd 91 DTC 5540 (FCA)

In 1969 the taxpayers agreed to transfer their coal licences in consideration for $200,000 and the covenant of the purchaser ("CNI") to pay $600,000 out of CNI's first revenues from the sale of any coal from operation of the licences, or out of proceeds from any disposition of the licences. The agreement provided: "This agreement shall be deemed to be concluded and fully satisfied at any time that the $600,000 has been paid." In 1977, after the transfer of the licences by CNI to its subsidiary, the taxpayers assigned all their interest in the agreement to the subsidiary for $600,000.

Rouleau, J. held that the plaintiff retained the right to receive proceeds of disposition until 1977, and the disposition occurred in 1977 rather than 1969.

Administrative Policy

15 May 2012 Canadian Petroleum Tax Roundtable, 2012-0446431C6 - 2012 CPTS: Farmout Arrangement

extension of farm-out position

The questioner stated that in 9406335, CRA stated that it would not extend its position in IT-125R4, para. 14 respecting farm-out arrangments that did not give rise to a disposition, to the acquisition of a royalty in exchange for exploration and drilling activities performed by the farmee on unproven Canadian resource properties of the farmor. When asked whether it would extend its policy in IT-125R4 to a situation where the interest transferred by the farmor to the farmee is a royalty, CRA stated that, as stated in 9406335, it

is prepared to consider, on an individual basis in the context of an advance income tax ruling application, whether such farmout treatment will be applied to a proposed transaction wherein a farmee is to obtain a royalty interest in exchange for exploration and drilling activities that it will perform on an unproven property of the farmor.

23 March 2011 Internal T.I. 2010-0389081I7 F - Disposition of a resource property

proceeds from mineral claims sale included undiscounted deferred cash proceeds, but might exclude share consideration until issued; purchaser’s CEE obligation excluded

The Vendor sold a percentage of its interest in unproven resource properties (the “Mining Properties”) in consideration for cash paid on signing and for stipulated cash sums and shares of the Purchaser (also a public corporation) which, in each case, were to be paid over a four-year period on the four anniversaries of the effective date of the agreement. The agreement was subject to specified conditions precedent.

After noting that the Mining Properties appeared to be property described in (f) of the Canadian resource property definition, that their disposition date was “the effective date and the date on which the conditions … were satisfied,” that the sale agreement did not specify a sale price, and that in F of the CCDE definition the “the expression ‘became receivable’ should have the same meaning as for the purposes of paragraph 12(1)(b),” the Directorate first turned to the cash component of the deferred consideration and stated that, having regard to jurisprudence indicating that where proceeds included note receivable, the value of such notes was not to be discounted:

this is even more the case when it comes to monetary consideration. Thus, for the purposes of F in the definition of CCDE in subsection 66.2(5), the amount of $XXXXXXXXXX should be part of the proceeds of disposition that became receivable by the Vendor in respect of the Mining Properties on the effective date of the agreement.

Turning to the deferred share issuance consideration portion of the sale consideration, the Directorate noted that over the four-year deferred payment period, the shares’ market price could “fluctuate greatly,” and stated that the TSO accordingly might:

conclude that such portion of the proceeds of disposition for the Mining Properties by the Vendor is not determinable prior to the date of issuance of the shares by the Purchaser and that such portion of the proceeds of disposition would be recognized for tax purposes at the times of their issuance … .

The Directorate also stated that it was prepared to extend the position in IT-125R4, para. 14 respecting farmouts to this situation, so that:

an amount equal to the exploration expenses [required to be incurred by the Purchaser] would not result in proceeds of disposition to the Vendor for purposes of element F … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Proceeds of Disposition - Paragraph (a) proceeds included full (undiscounted) deferred cash proceeds, but might exclude share consideration (with volatile market price) until issued 167
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(g) deferred share consideration potentially not recognized until issuance 97
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(b) full undiscounted amount of future cash consideration to be included as an amount receivable 184


Randy S. Morphy, Kim Maguire, "An Update on the Taxation of Farm-outs", Resource Sector Taxation, Vol. IX, No. 3, 2013, p. 661.

Need to rely on IT-125 (p. 661)

The application of the Income Tax Act to farm-outs on a technical basis remains unresolved: there are no specific provisions of the Act that apply and there is no jurisprudence directly on point. As such, taxpayers have come to rely on and structure into the rather favourable administrative treatment applied by the CRA to certain types of farm-outs described in IT-125 (the "Administrative Treatment")….

Summary of CRA comments (p. 662)

The CRA's comments [in a number of technical interpretations] may be summarized as follows:

  1. In cases where a simple farm-out forms part of a larger transaction, the CRA will apply the Administrative Treatment to the farm-out aspect of the transaction where that aspect of the transaction can be identified and notionally separated from the overall transaction.
  2. In cases where a simple farm-out is one of a number of interrelated transactions, the CRA may seek to aggregate the farm-out with related transactions to form a single transaction for the purposes of applying the Administrative Treatment.
  3. In cases where the farmee receives a royalty rather than a percentage interest in an unproven resource property in consideration for performing exploration and development work, the CRA will consider applying the Administrative Treatment in the context of an advance tax ruling and according to the "historical basis" of the Administrative Treatment, but will not offer a blanket extension of the Administrative Treatment in the form of a technical interpretation. The CRA has also indicated the same willingness to consider extending the application of the Administrative Treatment to a farm-out under which the farmee acquires an option to acquire a percentage interest in an unproven resource property.
  4. The CRA will not extend the Administrative Treatment to transactions outside the resource sector, which are arguably analogous to a simple farm-out in a commercial sense.