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.