Application of purpose test in (f) (pp. 10:14-17)
Revenue Quebec is of the opinion that expenses that are incidental to exploration work qualify as CEE if, and only if, those expenses are necessary for the performance of the work [f.n.74: ...13-018332-001...March 5, 2014; ...13-016735001...September 20, 2013.] ...
In paragraph 66.1(6)(f) of the ITA ("Canadian exploration expense") and paragraph (c) of section 395 of the QTA, there is no requirement for an expense that is incurred to be essential or compulsory for carrying on the activities of a mining corporation in order for it to constitute a paragraph 66.1 (6)(f) eligible mining CEE. it is sufficient that the expense was incurred for one of the stipulated purposes-- namely, to determine the existence of a mineral resource in Canada, locate such a resource, or determine its extent or quality.
[I]t is well established in the jurisprudence that the purpose or object test in the definition of mining CEE can be satisfied even if the expense is incurred for more than one purpose and that this test only requires a simple connection between the expenses incurred and the actual exploration work or, failing that, a credible plan showing the taxpayer's intention of carrying out such work [f.n. 78: Petro-Canada...2004 FCA 158, para 34 and 35; Gulf Canada...92 DTC 6123 (F.C.A)...; Global Communications...1999 CanLII 8206]. ...
A broad and liberal interpretation is also supported by the definition of overhead expense, where the costs related to administration, management, and financing are implicitly deemed to be mining CEE or mining CDE.
Application of expense denial in (v.1) of (f) of the CEE definition (pp. 10:17-20)
[S]ubparagraph (v.1) of paragraph (f) of the definition of CEE...[e]xcludes certain expenses incurred before a new mine comes into production in reasonable commercial quantities" ("pre-production CEE") that permits income to be earned or that could reasonably permit income to be earned before the mine in question comes into production in reasonable commercial quantities ("pre-production Income"). ...
The Canada Revenue Agency is generally of the opinion that "coming into production" begins on the first day of the 90-day period in which the mill has operated constantly at 60 percent of its theoretical capacity. ...
In...(the "2012 Roundtable"), the CRA had stated that it applied former paragraph 66.1(6)(k.2) of the definition of CEE in the same way as it applies subparagraph 66.1(6)(f)(v.1) of the ITA. In this regard, the CRA released an administrative position on former paragraph (k.2) [f.n. 89: 2006-0210261E5]:
Accordingly, due to the application of paragraph (k.2) of the definition of CEE in subsection 66.1(6), it is only the amount of the expenses incurred by ACO for the sampling operations, net of the income generated from the sale of the gold recovered in those operations, that could qualify as CEE, not the gross amount of such expenses.
It should be noted that technically, even though the income generated from the sale of the gold recovered in the sampling operations is earned by ACO in the taxation year following that in which the expenses related to such operations were incurred, that income would nevertheless be contemplated by paragraph (k.2) and should be considered in determining the net amount of the expenses contemplated by paragraph (f) of the definition of CEE in subsection 66.1(6). [TRANSLATION]
...The use of "that results" instead of "to have resulted" confirms that as of November 6, 2010, the pre-production CEE incurred by the taxpayer in a particular year must be reduced as of the time pre-production Income is earned on the pre-production CEE in question, even if the pre-production Income is earned in a subsequent year. By repealing former paragraph (k.2) and adopting subparagraph (v.1), the legislator has enacted certain elements of the CRA's administrative position on paragraph (K.2). ...
[I]f the aggregate of the pre-production CEE represents $150 and the pre-production Income to which it relates is $100, why should the taxpayer's CEE be reduced by $100? The wording of subparagraph (v.1) is not unclear, and it addresses the disqualification of the expense if the pre-production income exceeds the pre-production CEE to which it can be tied. Nowhere is it stated that the pre-production Income must reduce the pre-production CEE. Conversely, if the aggregate of the pre-production CEE represents $100, and the pre-production Income is $150, why should the taxpayer's CEE be reduced by $150? Should if not instead be reduced by $100?
Subparagraph (v.1) states is that the term CEE excludes pre-production CEE that results in the earning of pre-production income or that could reasonably result in the earning of such income. Therefore, it is only the pre-production CEE that must be excluded from the CEE, not an amount of CEE corresponding to the pre-production Income tied to the pre-production CEE. In addition, pre-production CEE will be excluded as CEE only if a connection can be made between the pre-production income that is earned (or which the mining corporation reasonably expects to earn) and the pre-production CEE. Regardless of when the pre-production Income is earned, that income can have an impact only on the pre-production CEE to which it relates.
Equivalent provincial credits (pp. 10:6-7)
An individual who is resident in another province of Canada can generally obtain a provincial tax credit that is similar to the federal tax credit, such as the British Colombia non-refundable mining flow-through share tax credit [f.n. 36: Income Tax Act, R.S.B.C. 1993, c. 215, s.4.721(3)] (20 percent), the Ontario focused flowthrough share tax credit (5 percent) [f.n. 37: Income Tax Act, R.S.O. 1990, c. I.2, s. 8.4.3(1).], the Manitoba mineral exploration tax credit [f.n. 38: The Income Tax Act, C.C.S.M., c. I10, s. 11.7.(2)(a)(iii)] (30 percent), and the Saskatchewan mineral exploration tax credit [f.n. 39: The Mineral Resources Act, 1985, S.S. 1985, S.S. 1984-85-86, c. M-16.1, s.10.1(2)] (10 percent)... .
Additional 10% Quebec deduction (p. 10:7)
An individual residing in the Province of Quebec can obtain the additional 10 percent deduction [f.n. 44: Section 726.4.9 QTA.] in respect of his "exploration base relating to certain Quebec exploration expenses" [f.n. 45: Section 726.4.10 QTA] , which essentially consists of 66.1 (6)(f) eligible mining CEE, if the following conditions are met:
- The 66.1(6)(f) eligible mining CEE is incurred in the province of Quebec [f.n. 46: Subparagraph (i) of paragraph (a) of section 726.4.10 QTA];
- The activities of the mining corporation are limited primarily to oil, gas or mineral exploration or the development of a mineral resource or oil or gas well [f.n. 47: Paragraph (b) of section 726.4.15 QTA];
- At the time the expenditures are incurred and throughout the preceding period of 12 months, the mining corporation [f.n. 48: Paragraph (b) of section 726.4.12...Information Bulletin 2013-2014, Changes to Various Measures of a Fiscal Nature, December 20, 2013. ]
(a) did not operate any mineral resource or any oil or gas well; and
(b) was not a member of an associated group any companies of which operated such resources.
Supplemental 10 percent Quebec deduction (pp. 10:7-8)
In addition..., an individual residing in the province of Quebec can obtain the supplemental 10 percent deduction (QC) [f.n. 51: Section 726.4.17.1] in respect of his "exploration base relating to certain Quebec surface mining or oil and gas exploration expenses" if:
- all of the applicable conditions for obtaining the additional 10 percent deduction (QC) in respect of those expenses are met; and
- the "exploration base relating to certain Quebec surface mining or oil and gas exploration expenses" consists of 66.1 (6)(f) eligible mining CEE, except for any of those expenses that:
(a) are related to removing overburden and stripping, where such work is more than is needed to obtain indicators of mineralization or for the preliminary sampling thereof
(b) are related to drilling and trenching or digging test pits, where such work constitutes underground exploration work.
Reclassification of preproduction development expenses (pp. 10:8-9)
The reclassification of preproduction development expenses, historically eligible mining CEE [occurs] pursuant to paragraph (g)... .
...As eligible mining CEE, pre-production development expenses could be either fully deductible when calculating the income of the mining corporation or renounced to investors and fully deducted by those investors. Under the 2013 changes, the costs of such intangible property incurred to bring a new mine to the state where it is producing reasonable commercial quantities-- such as the costs of stripping and removal of the overburden, excavation, the drilling of a mine shaft, and construction of an adit or underground passage, to name just a few-- were transferred from the mining CEE scheme to the mining CDE scheme, which allows only a 30 percent tax reduction calculated on a declining balance.
Whether reduction for Quebec resource credit (pp. 10:24-25)
A problem arises when mining projects located in the province of Quebec are financed through the issuance of flowthrough shares and non-Quebec investors are involved. A mining corporation involved in such a financing could flirt with the idea that in the event of misqualification of an expense as paragraph 66.1(6)(f) eligible mining CEE, it would only have to substitute, for purposes of the renunciation, an expense in respect of which the Quebec resources credit could have been claimed. In such a situation, however, the CRA could argue that at the time of the renunciation, the corporation could reasonably have expected to receive, at a given time, a Quebec resources credit in respect of the substituted expenditure. ...
Paragraph 127(11.1)(c.2) ITA states that the amount of government assistance in respect of expenses included in the calculation of a taxpayer's flowthrough mining expenditure reduces that expenditure if, at the time of filing his return of income for the year, the taxpayer has received, is entitled to receive or can reasonably be expected to receive the assistance in question.
Paragraph 66(12.6)(a) seems broader to us because the reasonability test it contains is not limited to the time of filing the return of income.
Assimilation of warrants to flow-through shares (pp. 10:22-23)
Issuers have been able to treat warrants as flowthrough shares without worrying about a potential contestation by the CRA since September 5, 2014, when the CRA revised its position in this regard:
In accordance with subsection 66(15) of the Act, provided that the right would otherwise qualify as a flow-through share, the right (other than a prescribed right) would continue to meet the conditions of a flow-through share when it is a right to acquire a share of the capital stock of a principal-business corporation that does not meet the definition of a flow-through share. [f.n. 94: 2014-0534941E5] [EMPHASIS ADDED]
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