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 expenses relating to a proposed new mine will qualify for inclusion under paragraph (g) of the definition of CEE.
Position: Yes.
Reasons: Based upon the facts and a written opinion from Natural Resources Canada.
XXXXXXXXXX
2012-045350
XXXXXXXXXX, 2013
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer.
We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:
(i) 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 considered by the Directorate involving the taxpayer or a related person.
DEFINITIONS
In this letter, the following terms have the meanings specified:
"Act" means the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter;
"Canadian exploration expense" ("CEE") has the meaning assigned to that term by subsection 66.1(6) of the Act;
"Canadian development expense" ("CDE") has the meaning assigned to that term by subsection 66.2(5) of the Act;
"Canadian resource property" has the meaning assigned to that term by subsection 66(15) of the Act;
"Corporation" means XXXXXXXXXX;
"mineral resource" has the meaning assigned to that term by subsection 248(1) of the Act;
"PA Report" means a report entitled XXXXXXXXXX dated XXXXXXXXXX prepared by XXXXXXXXXX;
"principal-business corporation" has the meaning assigned to the term by subsection 66(15) of the Act;
"Property" means the approximately XXXXXXXXXX hectares comprised of XXXXXXXXXX active claims and XXXXXXXXXX leases (covering XXXXXXXXXX leased claims) located about XXXXXXXXXX. The property is located within XXXXXXXXXX;
"private corporation" has the meaning assigned to that term by subsection 89(1) of the Act; and
"taxable Canadian corporation" has the meaning assigned to that term by subsection 89(1) of the Act.
Our understanding of the statement of facts, proposed transactions and the purpose of the proposed transactions is as follows:
FACTS
1. The Corporation was incorporated as XXXXXXXXXX under the laws of XXXXXXXXXX on XXXXXXXXXX. The Corporation is XXXXXXXXXX with a taxation year end of XXXXXXXXXX. The Corporation's business number is XXXXXXXXXX.
2. The Corporation's head office is located at XXXXXXXXXX. The Corporation is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.
3. The Property was first staked in XXXXXXXXXX. It was explored intermittently during the following XXXXXXXXXX years, XXXXXXXXXX.
4. The Property was acquired by XXXXXXXXXX in XXXXXXXXXX and this corporation commenced an exploration program that included XXXXXXXXXX drilling campaigns during XXXXXXXXXX. In XXXXXXXXXX, ore reserves were estimated to be XXXXXXXXXX tonnes with XXXXXXXXXX.
5. In XXXXXXXXXX, XXXXXXXXXX developed an open pit mine operation on the Property and a flotation mill was constructed. The mine and mill complex were designed to operate at a rate of XXXXXXXXXX tonnes of ore per day (XXXXXXXXXX tonnes of ore per year). A refinery (XXXXXXXXXX plant) was constructed XXXXXXXXXX to produce higher grade concentrates for specialty applications. The refinery was completed in XXXXXXXXXX.
6. In XXXXXXXXXX modifications, including the addition of a XXXXXXXXXX. These modifications increased the daily throughput of the operation, to XXXXXXXXXX tonnes of ore per day in XXXXXXXXXX to a level of XXXXXXXXXX tonnes of ore per day by XXXXXXXXXX.
7. Production at the Property ceased in XXXXXXXXXX when XXXXXXXXXX. The mill was put on care and maintenance, but the mining contractor removed the machinery and equipment from the mine and the open pit was allowed to fill with water. The mine was closed in XXXXXXXXXX.
8. According to the PA Report, while in production from XXXXXXXXXX to XXXXXXXXXX throughput from the mine never came close to attaining the designed capacity of XXXXXXXXXX tonnes per month, only exceeding XXXXXXXXXX% of capacity for one month before it was closed as a bottleneck in the drying section hampered production. The mine did not achieve production in reasonable commercial quantities during the period of XXXXXXXXXX.
9. In XXXXXXXXXX, the Property was acquired by XXXXXXXXXX. XXXXXXXXXX formed the Corporation as a subsidiary. On XXXXXXXXXX the Corporation acquired the mining rights and related assets from its then parent corporation XXXXXXXXXX. Since XXXXXXXXXX, the Corporation has been assessing the viability of modifying and refurbishing the mill and reopening the mine, as the market for XXXXXXXXXX has improved.
10. The mine has remained closed since XXXXXXXXXX.
11. The principal mineral to be extracted from the mining and milling facility to be developed on the Property is XXXXXXXXXX.
12. In XXXXXXXXXX, under a former owner, the Property received XXXXXXXXXX Ministry of the Environment environmental control order.
13. The Corporation has submitted a Closure Plan developed in accordance with XXXXXXXXXX.
PROPOSED TRANSACTIONS
14. The Corporation has created a development program for the Property (the "Proposed Development Program"). Some of the original mining and milling equipment will be used in bringing the mine into operation, for example, XXXXXXXXXX. All of the remaining mining equipment including XXXXXXXXXX will be acquired for the operation.
15. The Corporation plans to expend approximately $XXXXXXXXXX on the mine and mill site plus post $XXXXXXXXXX as security for reclamation to develop the Property and bring it into production.
The XXXXXXXXXX deposits on the Property qualify as a mineral resource pursuant to subparagraph (d)(i) of the definition of this term in subsection 248(1) of the Act.
PURPOSE OF THE PROPOSED TRANSACTIONS
16. The proposed transactions are being undertaken for the purpose of developing a new XXXXXXXXXX mine.
RULINGS
Provided that the preceding statements constitutes a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, subject to the Opinion provide below, we confirm the following:
A. The Proposed Development Program will be a new mine in a mineral resource in Canada for purpose of the definition "Canadian exploration expense" under subsection 66.1(6) of the Act.
B. Any expense, other than
a. an expense that results in revenue or can reasonably be expected to result in revenue earned before the new mine comes into production in reasonable commercial quantities, except to the extent that the total of such expenses exceeds the total of those revenues; and
b. an expense that constitutes the cost, or any part of the cost to the Corporation of any depreciable property or Canadian resource property;
that will be incurred by the Corporation for the purpose of bringing the mine into production in reasonable commercial quantities and incurred before the new mine comes into production in reasonable commercial quantities will, subject to the Opinion provided below, be a Canadian exploration expense of the Corporation within the meaning of paragraph (g) of the definition under subsection 66.1(6) of the Act.
Except as expressly stated, these rulings do 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:
(a) the reasonableness of any expenditure referred to in this letter;
(b) whether any particular expense not considered to be CEE will qualify as a CDE;
(c) whether the Corporation is a principal-business corporation; or
(d) the tax treatment of the $XXXXXXXXXX that the Corporation will post as security for the reclamation of the Property.
The above advance income tax rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
OPINION
Provided that paragraph (g) of the definition "Canadian exploration expense" in subsection 66.1(6) of the Act is enacted in substantially the same form as proposed in the Notice of Ways and Means Motion to introduce an Act to amend the Income Tax Act released by the Minister of Finance on March 21, 2013, any expense incurred under the Proposed Development Program for the purpose of bringing a new mine in a mineral resource in Canada into production in reasonable commercial quantities and incurred before the new mine comes into production in such quantities may not qualify as Canadian exploration expense except as provided under proposed paragraph (g.4) of the definition under subsection 66.1(6).
In accordance with paragraph 22 of Information Circular 70-6R5, the comments in the immediately preceding paragraph are only an expression of an opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the Canada Revenue Agency.
Yours truly,
XXXXXXXXXX
Manager
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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