Section 66.1

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.

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.

Exploration background

The Company (a taxable Canadian corporation and a principal business corporation (“PBC”)) holds the former-mining Property, which had been in production but was never able to achieve production targets, so that production was terminated. The Company has determined after study that the Property could become economically viable if there were a significant increase in the resource so as to support a higher throughput tonnage scenario.

Accordingly, it is proposed that the Company engage in scout and expansion drilling at surface, and in expansion and infill drilling underground, including related work such as the construction of underground infrastructure, in order to expand the resource.

Company structure

The Company is wholly-owned by a non-resident company (Company B), which is a principal business corporation and whose shares are listed on an exchange.

Proposed transactions

Company B will acquire an undivided interest in the Property from the Company for a cash purchase price equal to its fair market value. The proceeds of disposition will be included by the Company in element “F” of the definition of cumulative CDE, and Company B will include its expenditure as a CDE pursuant to para. (e) of that definition.

Company B and the Company will enter into a joint-venture agreement to jointly explore and develop the Property with the Company being the operator of the joint venture, so that it will conduct exploration activities at the Property, on its own behalf and as nominee on behalf of Company B, with each party bearing its proportionate share of any expenditures incurred.

The Company will distribute the cash proceeds as a paid-up capital distribution to Company B.

By carrying out these exploration activities, Company B will be carrying on business in Canada.

The Company’s portion of the exploration expenditures will be financed by its issuing flow-through (common) shares (FTS) to Company B.

To fund its exploration work, Company B intends to issue FTS to Canadian investors, and to 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.

Rulings

The Property is not a mine that has come into production in reasonable commercial quantities for the purposes of s. (f)(vi) of the definition of CEE in s. 66.1(6).

Ruling re the qualification of the expenditures as CEE.

Regarding whether the test of incurring an expense “for the purpose of determining the existence, location, extent, or quality of a mineral resource” (the “CEE Purpose Test”) would generally include expenses for determining the economic feasibility of a deposit, such as expenses for preparing pre-feasibility or feasibility studies (including expenses for determining the cut-off grade of the deposit), market studies or studies for determining the anticipated long-term price of a mineral, based on an expansive interpretation of the word “quality,” CRA noted:

• “the word ‘quality’ could be capable of an interpretation that either includes the concept of commercial value or that instead focuses more narrowly on the physical or inherent aspects of a particular item
• having regard to the ejusdem generis rule, it was to be noted that “the first three words in the list in the CEE Purpose Test” referred to “the inherent physical characteristics of the mineral resource,” which suggested that the word the word “quality” should be similarly “limited to inherent characteristics of the mineral resource,” so that it “could encompass other inherent characteristics of the mineral resource such as its chemical composition or mechanical properties (e.g., strength or porosity).”
• various materials suggested that the purpose to the provision was “the search for, or discovery of, the minerals in the ground,” and that expenses related to “external factors, for example the cost of bringing a product to purchasers, including marketing and distribution costs … or to the overall assessment of economic viability through a pre-feasibility study or feasibility study, extend well beyond the focused nature of an incentive targeted at the activity of mineral exploration.”

CRA concluded:

[E]xpenses that qualify for CEE do not … include expenses for determining the economic viability of a mineral resource if those expenses do not relate to a determination of the natural (e.g., physical, chemical or mechanical) characteristics of the mineral resource. Such expenses are too remote to be described as expenses incurred for the purpose of determining the “quality” of a resource.

Items included in para. (f) of Canadian exploration expense include:

• Planning the exploration program and reviewing previous exploration results
• Community consultations and environmental studies required to obtain exploration permits
• Airborne (or satellite) surveys and prospecting (to identify targets or showings)
• Soil or rock sampling (other than of tailings)
• Geophysical and geochemical surveys along with interpretation, geological mapping and modeling
• Exploration drilling and laboratory testing of drilling cores, and mineralogical analysis and assays
• Trenching (i.e., to expose steeply-dipping mineralization) and digging test pits (for shallow mineralization)
• Definition or infill drilling,
• Resource estimation and deposit delineation, deposit modelling and updating resource estimates
• Testing of rock stability, of mineral resource dilution (re waste rock) and of metallurgy (re difficulty of separating pay material) including grinding tests
• Metallurgical separation testing on core or bulk samples (to determine recoverable percentage of minerals) – but not if for determining an optimal method of separation
• Bulk sampling (in reasonable sizes) for determining the effective grade (after dilution), performing grinding tests and whether any separation process (e.g. flotation or solvent extraction) allows minimum quality specifications - provided it is not for determining the optimal processing method

Note: various of the above items do not qualify as CEE if they are performed for camp, infrastructure or mine design purposes.

Also note: para. (f) potentially may include activities engaged in after the feasibility study preparation “to increase the level of geological knowledge and confidence in the mineral resource.”

Pre-feasibility and feasibility studies generally give rise to deductions under s. 9.

The following are deductible under s. 9 if incurred before making a decision to bring the mine into production (otherwise generally Class 41 or 41.2 assets or other depreciable property, or Class 14.1 if the property is not acquired – or CDE under para. (c.2) re the 1^st or 5^th item if to bring a new mine into production):

• Mine design or development studies
• Evaluation of transportation from the mine to the processing plant
• Evaluation of different technically feasible options for processing
• Process engineering studies
• Estimates of capital and operating costs

Costs of mineral claims and exploration permits (both of which are Canadian resource properties) are CDE under para. (e)

Background

The Company purchased the Project, including Property A (on which there is a continuous, massive deposit (the Deposit”)) consisting of a surface deposit with a potential open-pit mine plan and an underground deposit with a potential “post pillar cut-and-fill” underground mine plan), and has since conducted several exploration campaigns thereon. The Deposit includes proven and probable mineral reserves. The Company completed a National Instrument 43-101 compliant technical reports and initial feasibility studies, indicating that the Project would be economically viable under the base case financial parameters and recommending that the Project be advanced to construction. However, the Company decided not to advance to construction and instead to continue exploring Property A. Surface drilling is impractical for these purposes due to the depth of the drilling required.

Proposed Transactions

Underground exploration will be facilitated by the development of an underground ramp which will provide underground access for diamond drilling and sampling. Drill holes will be sequenced during advancement of the ramp in a strategic manner to ensure maximum drilling production during ramp advancement.

Additional Information

No positive decision has been made by the Company’s board of directors to bring any part of the Project into production. The Company anticipates that the ramp will be also used in the future for mining operations to bring ore up to the surface.

Purpose

The Proposed Transactions are being undertaken for the purpose of conducting an exploration and mineral resource evaluation program in order to determine the existence, location, extent and quality of the Deposit that would be expected to be mined by creating a new underground mining infrastructure and using underground mining methods.

Ruling

Re qualification under para. (f) (and comment that “Expenses incurred in order to determine the economic feasibility of whether or not to proceed with developing a new mine.”)

CRA categorized different types of pre-mining expenditures, including the following:

In order to secure access to and explore a property (the “Property”) in which an aboriginal community (the “Community”) has asserted an interest, Canco (an exploration company) is engaging with the Community to seek its support for an exploration program. Accordingly, Canco will incur the following expenses:

a. Capacity Payments: Funds initially advanced to the Community to enable it to consult with and inform its members about the program’s potential impact - but without a requirement to account to Canco as to the use of the funds.

b. Ongoing Consultations Expenses: These expenses (incurred after obtaining an exploration permit and in order to report on progress) include costs of Community meetings and reports to the Community.

c. Environmental Assessment Expenses: These are expenses to undertake various environmental studies or assessments as to the potential impact the exploration program, e.g., as to species at risk.

d. Legal Documentation Expenses: These include costs of documenting (i) the agreed arrangements with the Community’s leaders (e.g. for employment and contracting opportunities for Community members) in relation to Canco carrying out the proposed exploration program, (ii) securing access to the Property, and (iii) undertakings agreed to by Canco.

Canco will raise funds for such expenses through the issuance of flow-through shares.

After noting that under the jurisprudence, “for an expense to have been incurred for the purpose of determining the existence, location, extent or quality of an accumulation of petroleum or natural gas, there would have to be a connection between that expense and the actual exploration work,” CRA turned to the specific expenses and stated:

Capacity Payments would generally be considered to satisfy the Purpose Test [in para. (f)] on the basis that they are incurred in order to secure access to and explore the Property and therefore are connected to the actual exploration work. …

Ongoing consultations expenses similar to those described above would appear to be in respect of the exploration process only and therefore would generally be considered to be CEE. …

[T]argeted environmental assessments, such as biodiversity and species at risk, that are conducted in conjunction with exploration activities would generally be considered to be CEE. …

[E]xpenses for legally documenting arrangements agreed to with the leaders of a community during community consultations would generally be considered to meet the Purpose Test and therefore would be considered to be CEE, to the extent that such legal documentation relates to the exploration process. ...

Any expenses … that relate to … the development, production or reclamation stages of the project), would not meet the Purpose Test … .

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).

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).

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).

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).

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.

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."

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...."

A mining exploration corporation (the "Purchaser") agreed with another mining exploration corporation (the "Vendor") to acquire an interest in the Vendor's unproven resource properties (the "Properties") in consideration for incurring specified exploration expenses. As part of this agreement, the Vendor also agreed to issue, for no significant consideration, warrants to the Purchaser to acquire treasury common shares. After noting that a portion of the consideration otherwise payable as Canadian exploration expense should be allocated to the warrants based on their value, the Directorate stated:

[T]he CRA's current position with respect to simple farm-out transactions is that there would be no cost to the farmee to acquire a property and that the farmee may consider the expenses incurred by the farmee to be Canadian exploration expenses if the expenses meet the definition of Canadian exploration expense in subsection 66.1(6). In this regard, we refer you to 2005-0119731E5. Consequently, in this case, the Purchaser would have no acquisition cost for the Properties. However, the portion of the exploration expenses incurred by the Purchaser to enable it to acquire the Properties (this portion not including, of course, the portion subject to the reductions described above) would constitute Canadian exploration expenses to the extent that such expenses otherwise qualify as such.

The results of preliminary exploration work indicated that further exploration of the “Property” was warranted – but this would require work on the Property to make it safer before geologists could perform the additional work. Would such work to make the property safe qualify under para. (f) if not for the cost of depreciable property? After noting various specific exclusions from Canadian exploration expense, CRA stated:

[T]he Canada Revenue Agency's position is to generally accept as CEE costs incurred for the purpose of ensuring the safety and protection of personnel and equipment used in activities that are directly related to exploration and activities carried out for the purpose of bringing a new mine into production in reasonable commercial quantities (other than the design and installation of production equipment) to the extent that the exceptions or exclusions noted above do not apply.

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).

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.

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.

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.

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).

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.

"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."

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.

"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 ..."

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).

"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."

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.

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.

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.

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.

A mining exploration corporation (the "Purchaser") agreed with another mining exploration corporation (the "Vendor") to acquire an interest in the Vendor's unproven resource properties (the "Properties") in consideration for incurring specified exploration expenses. As part of this agreement, the Vendor also agreed to issue, for no significant consideration, warrants to the Purchaser to acquire treasury common shares. The Directorate stated:

Taking into account, among other things, the letter of intent and considering the final agreement as a whole, that there would be good arguments for concluding that a portion of the … expenses incurred by the Purchaser constituted consideration given by the taxpayer for a right in respect of a share of the Vendor. .. [T]hat consideration should be deducted by virtue of paragraph (j) … from Canadian exploration expenses otherwise computed. That portion of the costs incurred by the Purchaser would, however, be the cost to the Purchaser of the warrants … .

An all-terrain vehicle to move around a mining property for exploration purposes came within the exclusion in para. (k.1) or (l).

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).

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 noted that it:

has taken the position in the past that the RDCL does not reduce cumulative Canadian exploration expenses ("CCEE") and cumulative Canadian development expenses ("CCDE"), on the basis that the RDCL was too remote from the Canadian exploration expense ("CEE") and Canadian development expense ("CDE") and therefore did not have a sufficiently direct connection to the CEE and CDE incurred by the particular corporation to fall within element J of the definition of CCEE in subsection 66.1(6) and the description of M in the definition of CCDE in subsection 66.2(5) … .