Principal Issues: Whether expenses relating to an exploration program will qualify for inclusion under paragraph (f) to the definition of CEE.
Position: Expenses to be incurred in respect of the proposed exploration program may potentially qualify under paragraph (f) to the definition of CEE. Expenses already incurred for 1 zone do not qualify.
Reasons: Based upon the facts of the situation and a written opinion received from Natural Resources Canada dated March 8, 2005. A representative of that Department visited the site and reached conclusions that support the above positions. The operating open mine pit could potentially be extended to mine any resource found in the zone where drilling has been completed.
XXXXXXXXXX 2004-010307
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above named corporation. We also acknowledge receipt of the additional information provided by XXXXXXXXXX.
We understand that to the best of your knowledge and that of the taxpayer involved, none of the issues contained herein:
(i) is in an earlier tax return of the taxpayer or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) is under objection by the taxpayer or a related person;
(iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; or
(v) is the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Definitions
Unless otherwise stated, in this letter, the following terms and expressions have the meanings specified below:
"Act" means the Income Tax Act R.S.C. 1985 (5th Supp.), c.1 as amended to the date of this letter,
"adjusted cost base" has the meaning assigned to that expression by section 54 of the Act,
"A Zone" means the XXXXXXXXXX,
"B Zone" means the XXXXXXXXXX,
"Canadian development expense" has the meaning assigned to that expression by subsection 66.2(5) of the Act,
"Canadian exploration expense" has the meaning assigned to that expression by subsection 66.1(6) of the Act,
"Canadian resource property" has the meaning assigned to that expression by subsection 66(15) of the Act,
"Concentrate" means XXXXXXXXXX,
"Corporation" means XXXXXXXXXX,
"C Zone" means the XXXXXXXXXX,
"depreciable property" has the meaning assigned to that term by subsection 13(21) of the Act,
"E Zone" means the XXXXXXXXXX,
"flow-through share" has the meaning assigned to that expression by subsection 66(15) of the Act,
"F Zone" means the XXXXXXXXXX,
"G Zone" means the XXXXXXXXXX,
"H Zone" means the XXXXXXXXXX,
"Mine" means the existing open pit mine known as the XXXXXXXXXX owned by the Corporation,
"mineral resource" has the meaning assigned to that term by subsection 248(1) of the Act,
"Ore" means an economic mixture of ore minerals, including XXXXXXXXXX mined from the Property,
"principal-business corporation" has the meaning assigned to that term by subsection 66(15) of the Act,
"Property" means the mining property located XXXXXXXXXX,
"public corporation" has the meaning assigned to that term by subsection 89(1) of the Act,
"taxable Canadian corporation" has the meaning assigned to that expression by subsection 89(1) of the Act, and
"XYZ Co." means XXXXXXXXXX.
Unless otherwise specified, all section references contained herein are to sections of the Act.
Facts
1. The Corporation was incorporated under the Canada Business Corporations Act on XXXXXXXXXX and its fiscal period ends on XXXXXXXXXX. The Corporation is a taxable Canadian corporation and a principal-business corporation. XYZ Co. owns all of the outstanding common shares of the Corporation and the Corporation is a wholly-owned subsidiary of XYZ Co. The registered and head office of the Corporation is located at XXXXXXXXXX. Its business number is XXXXXXXXXX and it is serviced by the XXXXXXXXXX Tax Services Office and files its annual income tax return at the XXXXXXXXXX Taxation Centre.
2. XYZ Co. was incorporated under the Canada Business Corporations Act on XXXXXXXXXX and its fiscal period ends on XXXXXXXXXX. The common shares of XYZ Co. trade on the XXXXXXXXXX Stock Exchange under the stock symbol XXXXXXXXXX and on the XXXXXXXXXX Stock Exchange under the symbol XXXXXXXXXX . XYZ Co. is a taxable Canadian corporation, a principal-business corporation and a public corporation. Its head office is at the same address as that of the Corporation. Its corporate tax number is XXXXXXXXXX and it is serviced by the XXXXXXXXXX Tax Services Office and files its annual income tax return at the XXXXXXXXXX Taxation Centre.
3. The Corporation owns and operates the Mine and a processing plant with a design capacity of XXXXXXXXXX tonnes per day (t/d). The mining and processing operation produces by flotation a Concentrate. Commercial production of the Mine started in XXXXXXXXXX at a rate of XXXXXXXXXX t/d. The production capacity at the mine-mill complex was expanded in XXXXXXXXXX to reach a capacity of XXXXXXXXXX t/d. The open pit is excavated by benches that are XXXXXXXXXX metres high where large trucks, shovels and loaders are used to mine the Ore. The open pit will ultimately be approximately XXXXXXXXXX metres deep.
4. The most significant zones of economic mineralization are in the Mine Block Intrusion, as well as in the E Zone, G Zone, B Zone, A Zone, F Zone, and the H Zone. The E Zone and G Zone are the only defined areas of economic mineralization on the Property. The F Zone is XXXXXXXXXX of the Mine and located XXXXXXXXXX metres from the centre of the Mine. That zone was the target of a drilling program in XXXXXXXXXX in which XXXXXXXXXX surface holes for a total length of XXXXXXXXXX metres for an average depth of XXXXXXXXXX metres per hole were drilled.
5. On XXXXXXXXXX, XYZ Co. issued XXXXXXXXXX flow-through shares for proceeds of $XXXXXXXXXX and subsequently purchased XXXXXXXXXX flow-through shares from the Corporation for proceeds of $XXXXXXXXXX. The proceeds of these share subscriptions are to be used by the Corporation, in part, for the exploration program described in paragraph 7 below.
6. On XXXXXXXXXX, the Corporation issued an additional XXXXXXXXXX flow-through shares to XYZ Co. for proceeds equal to $XXXXXXXXXX. These proceeds will also be used by the Corporation, in part, for the exploration program described in paragraph 7 below. The Corporation will renounce exploration expenses that qualify as CEE in favour of XYZ Co. pursuant to subsection 66(12.6) of the Act. On XXXXXXXXXX, XYZ Co. issued XXXXXXXXXX flow-through shares in a public offering to investors for proceeds of $XXXXXXXXXX. XYZ Co. will renounce the CEE renounced to it by the Corporation to the subscribers of the public offering. Additional flow-through financings may be entered into from time to time, the proceeds of which may be used for the expenditures described in paragraph 7 below.
Proposed Transactions
7. The Corporation began an exploration program in XXXXXXXXXX within XXXXXXXXXX kilometres of the Mine which is continuing in XXXXXXXXXX. The proposed exploration program consists of a regional airborne magnetic and resistivity survey and diamond drilling of the XXXXXXXXXX Complex on the Property. The XXXXXXXXXX Complex is one of many XXXXXXXXXX metal-bearing, mafic to ultramafic intrusions that define a circular feature with a diameter of XXXXXXXXXX kilometres. The bulk of the proposed expenditures will be incurred for surface diamond drilling on geological, geochemical and geophysical targets within the XXXXXXXXXX Complex, but outside the known reserves. The program will explore three targets proximate to the Mine:
a) the A Zone,
b) the B Zone, and
c) the H Zone
(hereinafter individually referred to as a "Target" and collectively as the "Targets"). The location of the Targets were delineated on a map provided of the Proposed Drill Hole Target Areas/ Mineblock Area. If there is production from any of the Targets, it would be processed at the existing milling facility at the Property.
a) A Zone
XXXXXXXXXX surface holes will be drilled in this zone for a total length of XXXXXXXXXX metres. This zone is located about XXXXXXXXXX of the Mine. The surface diamond drilling for this zone will explore for mineralization that is not planned to be exploited by the Mine. This area is far enough away from the Mine that, if enough Ore is found, the exploitation will require a new open pit mine.
b) B Zone
XXXXXXXXXX surface holes for a total length of about XXXXXXXXXX metres will be drilled in the B Zone located approximately XXXXXXXXXX of the Mine. The surface diamond drilling for this zone will explore for mineralization that is not planned to be exploited by the Mine. This area is far enough away from the Mine that, if enough Ore is found, the exploitation will likely require a new open pit mine. This pit would require pre-stripping of overburden, road access and a facility for staging and supply access for truck haulage and drill basting.
c) H Zone
A systematic drill hole program totaling XXXXXXXXXX metres of core will be drilled on the H Zone which is more than XXXXXXXXXX of the Mine. The surface diamond drilling of XXXXXXXXXX holes for this zone will explore for mineralization that is not planned to be exploited by the Mine. This area is far enough away from the Mine that, if enough Ore is found, the exploitation will require a new open pit mine.
Purpose of the Proposed Transactions
8. The proposed transactions described in paragraph 7 above are being undertaken in XXXXXXXXXX for the purpose of determining the existence, location, extent and quality of mineral resources located close to the surface but beyond the planned boundary of the Mine with a view to developing additional open pit mines.
Ruling Requested and Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our ruling is as follows:
We confirm that
An expense incurred by the Corporation, after the date of this letter and in respect of the exploration program referred to in paragraph 7 above, for the purpose of determining the existence, location, extent or quality of a mineral resource in the A Zone, B Zone, and H Zone, including any expense incurred in the course of:
(i) prospecting,
(ii) carrying out geological, geophysical, or geochemical surveys,
(iii) drilling by rotary, diamond, percussion, or other methods, or
(iv) trenching, digging test pits, and preliminary sampling,
but not including any Canadian development expense, will qualify as Canadian exploration expense ("CEE") of the Corporation pursuant to paragraph (f) of the definition thereof contained in subsection 66.1(6) of the Act provided:
a) the expense does not constitute the cost, or any part of the cost, to the Corporation of any depreciable property;
b) the expense is not one described in paragraph (k.2) of the definition of CEE;
c) the expense is incurred before a mine comes into production in reasonable commercial quantities in respect of any mineralization that may be found in the three zones referred to above pursuant to the exploration program described in paragraph 7 above; and
d) if the exploration program described in paragraph 7 above culminates in the development of a mining operation, such operation is conducted utilizing a new open pit mine rather than an extension of a mine that has come into production in reasonable commercial quantities.
Comments
1. Except as expressly stated, our ruling does not imply acceptance, approval or confirmation of any income tax implications relating to the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly:
i) the determination of the fair market value or adjusted cost base of any property referred to herein;
ii) whether any particular expense incurred by the Corporation in respect of the exploration program referred to in paragraph 7 above will qualify as CEE of the Corporation; and
iii) whether any share in the capital stock of the Corporation or XYZ Co. described in paragraphs 5 and 6 above will be a flow-through share.
2. It is our opinion that the exploration expenses that were incurred in respect of the F Zone described in paragraph 4 above will not qualify as CEE as the pit limit of the Mine could be extended to mine the mineral resource located in that zone. Therefore, these expenses may reasonably be considered to be related to a mine that has come into production in reasonable commercial quantities or to be related to a potential or actual extension thereof for the purposes of paragraph (f) of the definition of CEE contained in subsection 66.1(6) of the Act.
The above ruling is given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued by the Canada Revenue Agency (the "Agency") on May 17, 2002 and is binding on the Agency provided that the proposed exploration program described in paragraph 7 above is completed by XXXXXXXXXX.
This ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments thereto.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch