Principal Issues: Given that the term "Agreement" is used in the definition of FTS in 66(15) and in the definition of CEE in 66.1(6)(g.3), whether the expenses incurred will be CEE or CDE in a given scenario.
Position: If the expenses are incurred pursuant to an agreement in writing and the expenses are incurred prior to 2015, 100% of the expenses will be CEE. If the expenses are incurred in 2015, 2016 or 2017, a portion of the expenses will be CEE and a portion will be CDE, in accordance with the percentages set out in paragraph 66.1(6)(g.4).
Reasons: See below.
October 11, 2017
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XXXXXXXXXX |
HEADQUARTERS |
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(450) 926-7592 |
HEADQUARTERS 2017-071918 |
Written agreement
This is in response to your letter of June 27, 2017 in which you asked us to make a determination in the following hypothetical situation.
Facts
1. Corporation X meets the requirements of a principal-business corporation as defined in subsection 66(15) of the Income Tax Act (the "Act");
2. Corporation X issues a flow-through share and satisfies all the requirements of subsection 66(15);
3. The issuance of flow-through shares results from a written agreement entered into on December 31, 2012, as required by subsection 66(15);
4. Corporation X opts to renounce its Canadian exploration expenses under the look-back rule and meets all of the conditions listed in subsection 66(12.66);
5. Corporation X enters into a written agreement dated June 20, 2013 with a subcontractor to incur expenses that are eligible as pre-production mine development expenses, with the work ending on December 31, 2013. The total amount paid by Corporation X to the sub-contractor is $2 million.
Question
You wish to know what date should be used in determining whether the costs incurred are part of the Canadian exploration expense ("CEE") or the Canadian development expense ("CDE") given that the same expression is used in the definition of flow-through shares in subsection 66(15) and paragraphs (g.3) and (g.4) of the definition of CEE in subsection 66.1(6).
Our Response
We must first determine whether the expenses mentioned above are CEE as defined in subsection 66.1(6) or CDE as defined in subsection 66.2(5).
As provided in paragraph (g) of the definition of CEE in subsection 66.1(6):
(g) any expense incurred by the taxpayer after November 16, 1978 and before March 21, 2013 for the purpose of bringing a new mine in a mineral resource in Canada,(…), into production in reasonable commercial quantities and incurred before the new mine comes into production in such quantities,
In the situation you described, the expenses were incurred on or after June 20, 2013. Thus, none of these expenses qualifies as CEE under paragraph (g) of the definition of CEE in subsection 66.1(6).
Paragraph (g.3) of the definition of CEE in subsection 66.1(6) provides that Corporation X's CEE includes any expense incurred by Corporation X that would be described in paragraph (g) if the reference to “March 21, 2013” in that paragraph were “2017” and that is incurred:
(i) under an agreement in writing entered into by the taxpayer before March 21, 2013
Finally, paragraph (g.4) of the definition of CEE in subsection 66.1(6) states that Corporation X's CEE includes any expense incurred by the taxpayer, the amount of which is determined by the following formula:
A × B
where
A
is an expense that would be described in paragraph (g) if the reference to “March 21, 2013” in that paragraph were “2018” and that is not described in paragraph (g.3), and
B
is
(i) 100% if the expense is incurred before 2015,
(ii) 80% if the expense is incurred in 2015,
(iii) 60% if the expense is incurred in 2016, and
(iv) 30% if the expense is incurred in 2017,
The Explanatory Notes to paragraph (g.4) of the definition of CEE in subsection 66.1(6) state:
... paragraph (g.4) is added to the definition of CEE to phase in the transition from the CEE to the CDE of the eligible pre-production mine development expenses incurred after March 20, 2013. A portion of the eligible pre-production mine development expenses, if incurred by a taxpayer before 2018, will continue to qualify as a CEE of the taxpayer based on the following rates: 100% of expense in 2013 and 2014, 80% of expense in 2015, 60% of expense in 2016, and 30% of expense in 2017. The remainder of the expense will qualify as a CDE of the taxpayer. Therefore, a taxpayer may allocate eligible pre-production mine development expenses in proportionally between two resource expense categories - CEE and CDE - based on the year in which the expense is incurred.
In the situation you have described, if 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.
If you wish additional information about this, do not hesitate to contact us.
Best regards,
Kimberly Wharram
Interim Manager
Resource Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and
Regulatory Affairs Branch