CASE STUDY #8
Recommended Solution:
(1) Review of the Act:
Canadian exploration expenses ("CEE") (defined in
paragraph 66.1(6)(a)) and Canadian development expenses
("CDE") (defined in paragraph 66.2(5)(a)) represent
specific expenses incurred by a taxpayer. Where
the CEE and CDE expenses are incurred by a partnership
and allocated to each partner, the expenses would not
qualify as CEE and CDE expenses since the expenses were
not incurred by the partner. Administratively, however,
the Department has allowed each partner to include their
CEE and CDE allocations in their respective CEE and CDE
pools. This administrative position has not been
extended to flow-through shares and to date it has not
been an issue. In this particular case, the resource expenditures
allocated by the partnership to Oilco will not be
eligible for renunciation to its flow-through share
investors pursuant to subsections 66(12.6) and 66(12.62)
and as such, GAAR would not be an issue. Other Comments:
The flow-through share rules are intended to encourage
new resource expenditures by permitting such expenditures
by corporations to be renounced in favour of investors
who are better able to take advantage of the related
deductions. In order to qualify as a valid renunciation
under subsections 66(12.6) and 66(12.62), the resource
expenditures must be incurred after the flow-through
share agreement has been entered into. The "Draft Amendments to the Income Tax Act and Related
Statutes" issued by the Honourable Michael H. Wilson
Minister of Finance in July 1990 introduces new
provisions into the Act to recognize CEE and CDE incurred
by partnerships and allocated to the partners. Proposed
subsection 66(10) will prevent the "warehousing" of
resource expenditures incurred prior to the existence of
a flow-through share agreement.000165