Exploration background
The Company (a taxable Canadian corporation and a principal business corporation (“PBC”)) holds the former-mining Property, which had been in production but was never able to achieve production targets, so that production was terminated. The Company has determined after study that the Property could become economically viable if there were a significant increase in the resource so as to support a higher throughput tonnage scenario.
Accordingly, it is proposed that the Company engage in scout and expansion drilling at surface, and in expansion and infill drilling underground, including related work such as the construction of underground infrastructure, in order to expand the resource.
Company structure
The Company is wholly-owned by a non-resident company (Company B), which is a principal business corporation and whose shares are listed on an exchange.
Proposed transactions
Company B will acquire an undivided interest in the Property from the Company for a cash purchase price equal to its fair market value. The proceeds of disposition will be included by the Company in element “F” of the definition of cumulative CDE, and Company B will include its expenditure as a CDE pursuant to para. (e) of that definition.
Company B and the Company will enter into a joint-venture agreement to jointly explore and develop the Property with the Company being the operator of the joint venture, so that it will conduct exploration activities at the Property, on its own behalf and as nominee on behalf of Company B, with each party bearing its proportionate share of any expenditures incurred.
The Company will distribute the cash proceeds as a paid-up capital distribution to Company B.
By carrying out these exploration activities, Company B will be carrying on business in Canada.
The Company’s portion of the exploration expenditures will be financed by its issuing flow-through (common) shares (FTS) to Company B.
To fund its exploration work, Company B intends to issue FTS to Canadian investors, and to renounce to them both the CEE directly incurred by it and the CEE renounced to it by the Company. The reason for Company B issuing FTS is that its listed shares may be more attractive to the Canadian investors.
Rulings
The Property is not a mine that has come into production in reasonable commercial quantities for the purposes of s. (f)(vi) of the definition of CEE in s. 66.1(6).
Ruling re the qualification of the expenditures as CEE.