| 19(1) | File No. 5-8125 |
| Frank S. Gillman | |
| (613) 957-8953 |
July 11, 1989
Dear Sirs
Re: Definition of Principal-business corporation (PBC) and the Restriction on the Deductibility of Canadian exploration expense
This is in reply to your letter dared May 9, 1989, wherein you requested our opinion with regards to the above-captioned subject matters.
You submitted the following scenario:
The only activity of a taxable Canadian corporation resident in Canada is to conduct mineral exploration in Canada on behalf of other corporations. The corporation has no interest in any of the properties on which it conducts exploration. It charges the companies for which it performs the exploration an amount equal to its actual costs plus a fee equal to a percentage of the total costs incurred. The corporation is a member of a group of associated corporations some of which own the properties on which this corporation conducts mineral exploration.
The company has purchases flow-through shares and has had Canadian exploration expense (""CE"") flowed out to it.
The corporation wishes to deduct CE in the current year in order to increase the non-capital loss which may be carried back to offset taxable income of prior years.
You requested the Department to comment on the following:
1. Is a corporation that explores for minerals on behalf of other corporations a PBC as a result of the phrase in subparagraph 66(15)(h)(ii) of the Income Tax Act (the "Act") "mining or exploring for minerals"?
2. If the corporation is a PBC, can the CE renounced to it as a result of the flow-through share investment be deducted to create a loss? In other words, is Revenue Canada prepared to give special treatment under subsection 66.1(2) of the Act to the CE that is not incurred directly by the corporation?
Additionally, you requested we address whether the conclusions would be different if the corporation, in addition to its activities as described above, held an interest in a mineral property on which it was conducting exploration work and this activity made up a small (10%) part of its total activities measured both as to number of employees and total revenue.
As expressed at paragraph 3 of Information circular 70-6R, dated December 18, 1978, the Department will not express opinions on definite transactions that are being proposed other than by way of an advance income tax ruling, nor will the Department provide rulings on completed transactions.
Nevertheless, the following general comments for you assistance are being expressed.
The provisions of paragraph 66(15)(h) of the Act defines the criteria for determining whether a corporation qualifies as a PBC. In order for a corporation to qualify under this definition it is necessary that its principal business operations are of a kind specified in that paragraph. This determination would be one of fact which must be considered by reference to the various activities carried on by the corporation. All the activities of the corporation for the full taxation year must be considered in order to arrive at a determination.
Subparagraph 66(15)(h)(ii) of the Act states that a corporation would qualify as a PBC if its principal business is mining and exploring for minerals. The Department has outlined the activities that are included in this phrase at paragraph 10 in Interpretation Bulletin 400.
The Bulletin at paragraph 13 further goes on to state, ""For a corporation to qualify as a principal-business corporation, it is not necessary that the qualifying activities described in paragraph 66(15)(h) be performed on property owned by that corporation. For example, a corporation whose principal business is the development and management of mineral properties owned by other companies may qualify as a principal-business corporation."" We refer you to the Supreme Court decision in MNR v. Consolid. Mogul Mines Ltd., 68 CTC 429, supporting the Departments position.
The requirement under subsection 66.1(2) of the Act regarding the deduction for cumulative Canadian exploration expense (CCEE) is restricted to the taxpayers income as determined under subparagraph (ii) of paragraph 66.1(2)(a) of the Act. Accordingly, a taxpayer who is a PBC is prevented from making a deduction under subsection 66.1(2) which exceeds its income as defined therein for the year. Subsection 66.1(2) of the Act refers to the taxpayers CCEE and makes no distinction on how this pool is formed in order to apply the restriction of the amount of deduction permitted.
We trust that these comments will be of some assistance.
Yours truly,
for the DirectorBilingual Services and ResourceIndustries DivisionRulings Directorate