Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1.whether proposed Deposit B mine will be extension of Deposit A mine or a new mine for CEE definition in 66.1(6)(f) and (g)
2.whether Deposit B mine will be new mine or part of a mine that has come into production in reasonable quantities for CCA
3.whether successored Deposit A mine expenses available to reduce income from Deposit B mine; that is, whether same Canadian resource property involved for Deposit A and Deposit B for 66.7(3) and (4) successor rules
Position:
1.no - new mine for CEE; not relevant whether one mineral resource or two
2.new mine for CCA
3.yes - same lease, same Canadian resource property, not relevant whether one mineral resource or two
Reasons:
1.no common underground workings or connections between the two mines, Oro Del Norte, Bethlehem Copper, Falconbridge Copper, Sept. 1985 Dept. of Finance Technical Notes re 66.1(6)(a)(iii.1)
2.no common underground workings or connections between the two mines
3.66(15) and 248(1) definition "Canadian resource property"; the "particular property" is the lease, and the lease which applies to the new mine is the same lease that was received from the original owner
XXXXXXXXXX 970647
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-referenced taxpayer in connection with the proposed transactions described below.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1.Resource Co. is a "taxable Canadian corporation" and a "public corporation" within the meaning of subsection 89(1) of the Income Tax Act (the "Act"). The address of Resource Co. is XXXXXXXXXX. Its tax return is filed with the XXXXXXXXXX Taxation Centre and the XXXXXXXXXX Tax Services Office and its account number is XXXXXXXXXX.
2.Resource Co. is in the resource exploration, development and production business. Its major assets consist of mineral claims in XXXXXXXXXX ("Deposit A")
XXXXXXXXXX
(the "Deposit A mine"). On XXXXXXXXXX Resource Sub was wound up into Resource Co. and all its assets and liabilities were transferred to Resource Co. Resource Co. continued to mine the Deposit A mine until XXXXXXXXXX.
3.XXXXXXXXXX ("Resource Public"), a taxable Canadian corporation and a public corporation, acquired control of Resource Co. on XXXXXXXXXX. Due to the acquisition of control and pursuant to subsection 66.7(10) of the Act, Resource Co. has successor Canadian Exploration Expenses and successor Canadian Development Expenses.
4. XXXXXXXXXX
5.Resource Co.'s management prepared a "Summary Report On The "Deposit A" Project" (the "Report") dated XXXXXXXXXX. Resource Co. has reviewed the Report and found it is currently valid in all respects. The Report describes the physical characteristics of the Deposit B mineralization, as compared to Deposit A, and describes the anticipated exploration program, including the anticipated access to the zone, haulage ways, drainage, and ventilation. Further, it refers to the need for new equipment specifically designed for the mining method to be employed in Deposit B. The report concludes that the exploration and development of Deposit B will occur independently of the existing workings of the Deposit A mine, such that a fully separate mining operation will be developed for Deposit B (the "Deposit B mine").
6.Both Deposit B (XXXXXXXXXX) and Deposit A are subject to mining Lease #XXXXXXXXXX, which totals XXXXXXXXXX hectares and covers Lots XXXXXXXXXX, and is held by Resource Co. Converted from previously existing mineral claims XXXXXXXXXX, the lease has a primary term of XXXXXXXXXX years.
7.No exploration or mining activity will be conducted at Deposit A during the period that Deposit B is being developed or mined.
8.None of the work on the Deposit B mine will be conducted from the Deposit A mine, nor will there be any underground connections between the two mines.
9.No underground facilities, workings or equipment from the Deposit A mine (which is currently closed with no plans for any resumption of activity) will be used for development and mining at the Deposit B mine and there will be no connections between such facilities, workings or equipment. No facilities, workings or equipment used to extract ore from the Deposit A mine will be used for development and mining at Deposit B. However, some of the surface facilities (camp, mill and access road) may be used.
Proposed Transactions
10.Although the Report refers to a XXXXXXXXXX exploration program, this program was never carried out and Resource Co. now intends to carry out an exploration program for Deposit B in XXXXXXXXXX. It will incur expenses for the purpose of determining the existence, location, extent or quality of the XXXXXXXXXX in Deposit B, as well as expenses for the purpose of bringing Deposit B into production in reasonable commercial quantities. At a later date, it will purchase mining machinery and equipment to be used in extracting the ore from Deposit B. The Deposit B mine will be operated by Resource Co.
11.Resource Co. will issue flow-through shares within the meaning of subsection 66(15) of the Act to assist in financing the exploration and development activities.
12.Resource Co. will renounce Canadian Exploration Expenses to the flow-through shareholders in accordance with the provisions of subsections 66(12.6) and 66(12.66) of the Act.
Purpose of the Proposed Transactions
13.Resource Co. wishes to finance the multi-phased exploration and development program for Deposit B in part through the issuance of flow-through shares and intends to renounce Canadian exploration expenditures to the flow-through share investors.
14.To the best of your knowledge and that of Resource Co., none of the issues involved in this ruling is being considered by a Tax Services Office or Taxation Centre in connection with a tax return already filed by Resource Co. or a related person, none of the issues involved is the subject of any Notice of Objection or is under appeal, and none of the issues involved is the subject of a ruling previously issued by the Directorate.
Rulings
A)Expenses incurred by Resource Co. for the purpose of determining the existence, location, extent or quality of the XXXXXXXXXX in Deposit B including any expense incurred in the course of:
(i) prospecting,
(ii) carrying out geological, geophysical or geochemical surveys,
(iii)drilling by rotary, diamond, percussion or other methods, or
(iv) trenching, digging test pits and preliminary sampling,
but not including any Canadian development expense (as defined in section 66.2 of the Act), will be Canadian Exploration Expenses within the meaning of paragraph (f) of the definition of "Canadian Exploration Expense" in subsection 66.1(6) of the Act, and will not be considered to be related to the Deposit A mine for the purposes of this paragraph, and, for greater certainty, the expenses will not include the cost of any property that is described in Schedule II of the Income Tax Regulations (the "Regulations").
B)The Deposit B mine will be considered to be a new mine in a mineral resource in Canada and any expense incurred by Resource Co. for the purpose of bringing the Deposit B mine into production in reasonable commercial quantities and incurred before the coming into production of the Deposit B mine will be a Canadian Exploration Expense within the meaning of paragraph (g) of the "Canadian Exploration Expense" definition in subsection 66.1(6) of the Act, and, for greater certainty, the expenses will not include the cost of any property that is described in Schedule II of the Regulations.
C)Depreciable property situated in Canada and acquired by Resource Co. principally for the purpose of gaining or producing income from the Deposit B mine will be considered as class 41(a) property as described in Schedule II of the Regulations, provided that
(i)the Deposit B mine came into production in reasonable commercial quantities,
(ii)the property was acquired before the Deposit B mine came into production,
(iii)the property had not been used prior to its acquisition by Resource Co. or by any person with whom Resource Co. was not dealing at arm's length, and
(iv) the property would otherwise be included in class 10 by virtue of paragraph (g), (k), (l) or (r) of that class.
D)In respect of property to which ruling C above applies, paragraph 1100(1)(y) of the Regulations will apply to permit Resource Co. to claim the additional capital cost allowance, provided all the properties were acquired for the purpose of gaining or producing income from only the Deposit B mine.
E)For purposes of calculating Resource Co.'s claim in future years for successor Canadian exploration expenses under subsection 66.7(3) of the Act and successor Canadian development expenses under subsection 66.7(4) of the Act relating to the XXXXXXXXXX acquisition of control of Resource Co., income attributable to production from the lease that is the Deposit B mine will be included in Resource Co.'s income from the "particular property" for the purposes of subparagraphs 66.7(3)(b)(i) and 66.7(4)(b)(i) of the Act.
The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and are binding on Revenue Canada provided Resource Co.'s exploration program on Deposit B begins and flow-through shares are issued by Resource Co. with respect to Deposit B before XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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