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.