| June 29, 1989 | |
| Audit Applications | Rulings Directorate |
| Specialized Audit Division | Resource Industries Section |
| Tax Incentive Audits Section | Allan B. Nelson |
| 957-8984 | |
| Glen Niemi | |
| File No. 7-4065 |
Subject: Minister's Mail Concerning Oil Well Classification
We are writing in response to your Round-Trip Memorandum to us date June 27, 1989, and our subsequent conversation on that same date.
To assist in the preparation of your response to the Minister's Mail referred to in your memo, you have asked us to confirm your understanding of the appropriate tax legislation as it relates to "exploratory" oil and gas wells.
We acknowledge that generally speaking, in order for the drilling costs incurred in respect of an "exploratory" oil or gas will to qualify as a Canadian exploration expense (CEE), the result so the drilling program must be known (refer to paragraph 66.1(6)(a)(ii), (ii.1) and (ii.2) of the Act).
This is in contrast to the Lahee Well Classification System, adopted by the Energy Resources Conservation Board (Alberta), which categorizes various types of wells, including exploratory wells, based primarily on information that is available in advance of the completion of the drilling program.
We also agree with your comments to 19(1) that any changes to the definition of CEE would be the responsibility of the Minister of Finance.
For your information, we have attached a copy of Revenue Canada's response to a similar query that was given at the June 1988 meeting of the Canadian Petroleum Tax Society.
If you have further queries on this matter please contact the writer.
Section Chief Resource Industries SectionBilingual Services and Resource Industries DivisionRulings Directorate