| 19(1) | File No. 5-9269 |
| Frank S. Gillman | |
| (613) 957-8953 |
April 20, 1990
Dear Sirs:
Re: Non-Capital Loss created by Resource expenditures
We are writing in reply to your letter of December 8, 1989 wherein you requested our opinion as to whether a taxpayer is permitted under the Income Tax Act (the "Act") to create a non-capital loss by claiming various resource expenditures, assuming that these resource expenses are referable to a source of income and not claimed under subdivision e of Part 1 of the Act, as provided by subsection 3(c) of the Act. In addition, you requested the Departments opinion as to whether flow-through shares would be considered as a source of income under the Act.
A taxpayer's deduction of Canadian Exploration Expense ("CEE") or Canadian Development Expense ("CDE") will not be restricted to the taxpayer's income otherwise determined for income tax purposes provided the taxpayer is not a principal business corporation. However in order for the taxpayer to deduct an amount of CEE and/or CDE in excess of his income as determined for tax purposes, and create a non-capital loss as defined in paragraph 111(8)(b) of the Act, the deduction under subsection 66.1(3) or 66.2(2) of the Act must be referable to a source i.e. a business or property. Should the said deduction not be referable to a particular source, then pursuant to paragraph 3(c) of the Act it may only be claimed as a subdivision e deduction which would limit it to the amount of income determined under paragraphs 3(a) and (b) of the Act.
For purposes of subsection 3(a) of the Act, flow-through shares constitute a source for purposes of a taxpayer claiming amounts of expenses. With regards to whether income from a source is property or business, each individual income item must be examined as this is a question of fact.
for the Director Bilingual Services and Resource Industries DivisionRulings Directorate