Question:
Whether Rulings' position of applying subsection 66(12.1) to reduce certain, resource pools of a taxpayer on the sale of output from a mine in a period prior to the date of the commencement of production in reasonable commercial quantities should be maintained?
Subsections 66(12 1) and 59(3.3)
Background
Before the date on which a mine comes into production in reasonable commercial quantities ("commercial production"), some production with respect to "bulk samples" or "mill start-up runs" generates what is commonly called pre-production revenue.
Other than depreciate property costs, there are two main types of expenditures incurred prior to commercial production, namely Canadian exploration expenses ("CEE") and operating costs. Most expenditures incurred before a mine comes into commercial production are CEE. However, due to the difficulty of identifying which category certain expenditures fell into, by mutual agreement between the resource industry and the Department, it became accepted practice, as far back as 1978, to treat all pre-production expenditures as exploration and development expenses (now CEE) with a reduction in such expenses by the amount of pre-production revenue earned.
The Department accepted this practice for administrative efficiency even though it was recognized that the actual cost of the production in most cases exceeded the revenue. This administrative practice continues to be consistent with generally accepted accounting principles. On occasion this administrative practice was not followed where a taxpayer believed it had made a profit on pre-production operations. In these instances, the Department allowed the taxpayer to attempt to prove its pre-production operating costs and deduct such costs from its pre-production revenue as costs of goods sold rather than CEE. In this way, the profit from the pre-production operations would be reported, the taxpayer's CEE would not be increased by the amount of pre-production operating costs and the relevant CEE would not be reduced by the amount of pre-production revenue.
21(1)(b)
Alternatives
21(1)(b) 9011000 - 9011999