2013 Ruling 2012-0441771R3 - Canadian Exploration Expenses

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.

Principal Issues: Whether the expenses relating to a proposed exploration program will qualify as Canadian exploration expenses under paragraph (f) of the definition of CEE, and will not be considered to be related to a mine that has come into production in reasonable commercial quantities or to a potential or actual extension thereof.

Position: The proposed exploration expenses will qualify as CEE under section 66.1(6) of the Act.

Reasons: Based on the facts presented and the XXXXXXXXXX opinion provided to us by Natural Resources Canada.

XXXXXXXXXX
2012-044177

XXXXXXXXXX, 2013

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge the additional information and update you provided on XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayers named above, none of the issues involved in the ruling request is:

(i) involved in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) before the courts; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate involving the taxpayer or a related person.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified below:

(a) XXXXXXXXXX;

(b) "Act" means the Income Tax Act (Canada), RSC 1985, c.1 (5th Supp.), as amended to the date of this letter;

(c) "Canadian development expense" or "CDE" has the meaning assigned to that term by subsection 66.2(5) of the Act;

(d) "Canadian exploration expense" or "CEE" has the meaning assigned to that term by subsection 66.1(6) of the Act;

(e) "Canadian resource property" has the meaning assigned to that term by subsection 66(15) of the Act;

(f) "Company" means XXXXXXXXXX, which was incorporated on XXXXXXXXXX under the Business Corporations Act (XXXXXXXXXX), and XXXXXXXXXX;

(g) "CRA" means the Canada Revenue Agency;

(h) "depreciable property" has the meaning assigned to that term in subsection 13(21) of the Act;

(i) "flow-through share" has the meaning assigned to that term by subsection 66(15) of the Act;

(j) "Former Mine" means the former producing XXXXXXXXXX mine described in Paragraph 5 of the Facts which was located on the Property;

(k) "mineral resource" has the meaning assigned to that term by subsection 248(1) of the Act;

(l) "XXXXXXXXXXCo" means XXXXXXXXXX;

(m) "NRCan" means Natural Resources Canada;

(n) XXXXXXXXXX;

(o) "Paragraph" refers to a numbered paragraph in this letter;

(p) "principal-business corporation" ("PBC") has the meaning assigned to that term by subsection 66(15) of the Act;

(q) "Property" means the mineral claims and mining leases in XXXXXXXXXX that were acquired on XXXXXXXXXX, held 100% by the Company and consists of XXXXXXXXXX mining leases (XXXXXXXXXX) totalling XXXXXXXXXX hectares and XXXXXXXXXX mineral claims (claim # XXXXXXXXXX) totalling XXXXXXXXXX hectares and includes the claims and leases of the Former Mine;

(r) "Proposed Transactions" means the transactions described in Paragraphs 21 and 22 below;

(s) "public corporation" has the meaning assigned to that term by subsection 89(1) of the Act;

(t) XXXXXXXXXX; and

(u) "taxable Canadian corporation" has the meaning assigned to that term by subsection 89(1) of the Act.

Unless otherwise specified, all section references contained herein are to sections of the Act, and all references to monetary amounts are in Canadian dollars.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

1. The Company is engaged in the XXXXXXXXXX. It is a taxable Canadian corporation, a public corporation and a principal-business corporation. The Company's taxation year ends on XXXXXXXXXX and its business number is XXXXXXXXXX. Its head office is located at XXXXXXXXXX. The Company is serviced by the XXXXXXXXXX Taxation Centre and the XXXXXXXXXX Tax Service Office of the CRA. Its shares are traded on the XXXXXXXXXX.

2. On XXXXXXXXXX, the Company acquired the Property from XXXXXXXXXX, including the claims and leases of the Former Mine. The Property is located in the XXXXXXXXXX. The Company's XXXXXXXXXX property includes the Property and mining leases and mineral claims which lie XXXXXXXXXX, collectively referred to as the "XXXXXXXXXX Property". The XXXXXXXXXX deposits in the XXXXXXXXXX Property are located approximately XXXXXXXXXX from the XXXXXXXXXX deposits in the Property.

3. The Property contains at least XXXXXXXXXX separate mineral deposits that are primarily XXXXXXXXXX deposits referred to as the XXXXXXXXXX deposits. XXXXXXXXXX.

4. The Property lies within a XXXXXXXXXX.

5. The Former Mine was XXXXXXXXXX mine and was formerly owned and operated by XXXXXXXXXX. The historic open pit mining was in the XXXXXXXXXX deposit and was limited to less than XXXXXXXXXX metre vertical depths. XXXXXXXXXX developed and operated the mine between XXXXXXXXXX and XXXXXXXXXX and mined approximately XXXXXXXXXX in XXXXXXXXXX. Intermittent mining from XXXXXXXXXX to XXXXXXXXXX was limited to XXXXXXXXXX shallow open pits developed on XXXXXXXXXX. Historical production is reported to be XXXXXXXXXX.

6. XXXXXXXXXX had acquired the Property in XXXXXXXXXX from XXXXXXXXXXCo. XXXXXXXXXXCo had constructed a mining and milling facility which began operating in XXXXXXXXXX and the first XXXXXXXXXX was produced in XXXXXXXXXX. Mine production averaged XXXXXXXXXX tonnes per day peaking at XXXXXXXXXX tonnes per day in XXXXXXXXXX which was far below the XXXXXXXXXX tonnes per day needed in order to meet the mill's designed capacity of XXXXXXXXXX tonnes per day at its design strip ratio of XXXXXXXXXX. The milling circuit was a XXXXXXXXXX. All electrical power was generated by XXXXXXXXXX on-site XXXXXXXXXX kilowatt diesel fuelled generators. Up to XXXXXXXXXX generators were required at any one time to supply the operations with the XXXXXXXXXX acting as a backup. A permanent camp accommodated operating personnel and provided room and board and recreational facilities.

7. In XXXXXXXXXX, XXXXXXXXXX acquired the Property from XXXXXXXXXXCo and conducted physical exploration work on the ground from XXXXXXXXXX to XXXXXXXXXX which was largely focused on XXXXXXXXXX. XXXXXXXXXX commenced stripping operations at the Former Mine site in XXXXXXXXXX and first XXXXXXXXXX production was realized in XXXXXXXXXX. XXXXXXXXXX utilized conventional open pit mining techniques similar to those used by XXXXXXXXXXCo. The mill circuitry was modified, including the installation of a pebble crusher bypass in XXXXXXXXXX, to overcome operating difficulties and to facilitate the processing of XXXXXXXXXX tonnes per day of ore. This is assumed to have been the designed capacity of the mill.

8. The historical information and data from XXXXXXXXXXCo and from XXXXXXXXXX about the Former Mine that would be required in order to ascertain whether or not the Former Mine has come into "production in reasonable commercial quantities" or the date that this would have occurred is not available. It appears that the amount of ore that was milled by XXXXXXXXXX in XXXXXXXXXX was approximately XXXXXXXXXX tonnes respectively. Consequently, it is assumed that the Former Mine had come into production in reasonable commercial quantities.

9. XXXXXXXXXX discontinued its mining operation in XXXXXXXXXX because of XXXXXXXXXX. The mine was closed in XXXXXXXXXX and placed on care and maintenance for a minimum of XXXXXXXXXX years while underground ore reserves and potential use of the milling facility to treat nearby deposits were evaluated. XXXXXXXXXX.

10. XXXXXXXXXX.

11. XXXXXXXXXX.

12. XXXXXXXXXX.

13. XXXXXXXXXX.

14. An initial estimate of the total "Inferred Mineral Resource" at the Property is XXXXXXXXXX tonne. At the present time, no "Measured Mineral Resource" or "Indicated Mineral Resource" or "Mineral Reserve" of any category has been identified for the Property. These terms are as defined in the Canadian Institute of Mining, Metallurgy and Petroleum definition standards for mineral resources and mineral reserves.

15. XXXXXXXXXX.

16. The XXXXXXXXXX deposit was not completely mined out when XXXXXXXXXX ceased production in XXXXXXXXXX. The Company believes a XXXXXXXXXX resource remains that has the potential to be expanded by drilling known mineralization to depth and along strike, as well as by exploring for XXXXXXXXXX that are known to exist, plunging over XXXXXXXXXX metres in depth.

17. After receiving its land use permit, the Company began to move materials to the Property at the beginning of XXXXXXXXXX, for the construction of an exploration camp at the site of the Former Mine. The exploration camp was completed in XXXXXXXXXX.

18. The Company commenced its XXXXXXXXXX exploration program by deploying XXXXXXXXXX diamond drills at that time. A total of XXXXXXXXXX metres of diamond drilling was planned to take place on the Property in XXXXXXXXXX: Winter in-fill and step-out drilling of approximately XXXXXXXXXX metres, and summer in-fill and step-out drilling of approximately XXXXXXXXXX metres. Actual drilling completed in XXXXXXXXXX was a combined XXXXXXXXXX metres.

19. Diamond drilling focused on definition drilling for XXXXXXXXXX resource expansion opportunities at the XXXXXXXXXX below the previously mined main pit of the Former Mine.

20. The Company completed approximately XXXXXXXXXX kilometres of geophysical surveys on the Property in XXXXXXXXXX.

PROPOSED TRANSACTIONS

21. Core samples resulting from drilling were tested and assayed to determine the characteristics of the ore body including the grade and mineralization of the ore body in the Property. The Company plans to conduct additional drilling and testing as part of its exploration program.

22. Should the financial market for junior exploration companies provide access to adequate capital, the Company will aggressively pursue and explore, through the use of financing that may include flow-through share financing, the above-mentioned XXXXXXXXXX in its XXXXXXXXXX drilling program.

PURPOSE OF THE PROPOSED TRANSACTIONS

23. The Proposed Transactions are being undertaken for the purpose of conducting an exploration program in order to expand and upgrade the mineral resource in the Property over the coming months.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our Ruling is as follows:

We confirm that, subject to our Comments below, an expense incurred by the Company in respect of the exploration undertaken on the Property, and incurred for the purpose of determining the existence, location, extent or quality of a mineral resource on the Property 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, will qualify as a Canadian exploration expense pursuant to paragraph (f) of the definition thereof in subsection 66.1(6) of the Act, provided that:

(i) the expense does not constitute the cost, or any part of the cost, to the Company of any depreciable property; and

(ii) the expense is incurred before a mine comes into production in reasonable commercial quantities in respect of any mineralization that may be found on the Property pursuant to the exploration program.

COMMENTS

Except as expressly stated, the ruling provided does not imply acceptance, approval or confirmation of any income tax implications of the Facts or Proposed Transactions. In particular, nothing in this letter should be interpreted as confirming either expressly or implicitly:

(i) the reasonableness of any expenditure referred to in this letter;

(ii) whether any particular expense incurred by the Company will qualify as CEE, or whether any particular expense not considered to be CEE will qualify as CDE;

(iii) whether the Company meets the definition of a principal-business corporation or whether any share issued by the Company will be a flow-through share;

(iv) the determination of the fair market value or adjusted cost base of any property referred to herein; and

(v) any tax consequences relating to the Facts and Proposed Transactions described herein, other than those specifically described in the ruling given above.

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the CRA provided that the Company commences implementing the Proposed Transactions by XXXXXXXXXX.

This ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.

Yours truly,

XXXXXXXXXX
Manager
Resources Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch