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 to be incurred by the taxpayer in constructing a temporary access road will qualify as "Canadian exploration expenses" pursuant to paragraph 66.1(6)(f) of that definition.
Position: Yes, provided that the facts and circumstances represented in the ruling are respected.
Reasons: The law.
XXXXXXXXXX 2024-101794
XXXXXXXXXX, 2024
Dear XXXXXXXXXX,
Re: Advance Income Tax Ruling Request – Temporary access road
XXXXXXXXXX
We are writing in response to your request for an advance income tax ruling, dated XXXXXXXXXX, on behalf of XXXXXXXXXX (“Company”). We also acknowledge the additional information provided in email correspondence, as well as the information provided during telephone conversations.
We understand that to the best of your knowledge and that of the Company, none of the proposed transactions and/or issues involved in this ruling are the same as or substantially similar to transactions or issues that are:
(a) in a previously filed tax return of the Company or a related person and;
(i) being considered by the Canada Revenue Agency (“CRA”) in connection with any such tax return;
(ii) under objection by the Company or a related person;
(iii) the subject of a current or completed court process involving the Company or a related person; or
(b) the subject of a ruling request previously considered by the Income Tax Ruling Directorate in relation to the Company or a related person.
Unless otherwise stated:
(a) all statutory references are to the provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the “Act”) and all references to regulations are to the Income Tax Regulations, C.R.C., c. 945, as amended (the “Regulations”);
(b) each term or expression mentioned in this letter and for which the Act (or the Regulations) provide a definition has the meaning given to it by that definition;
(c) all amounts are in Canadian dollars;
(d) words importing the singular number only include the plural and vice versa; and
(e) any references made within this letter to dollar values represent budgeted or estimated costs only and may not reflect the actual costs incurred per the books and records of the Company.
I. DEFINITIONS
“ACo” means XXXXXXXXXX;
“BCo” means XXXXXXXXXX;
XXXXXXXXXX;
“Canadian development expense” or “CDE” has the meaning assigned to that term by subsection 66.2(5);
“Canadian exploration and development overhead expense” or “CEDOE” has the meaning assigned to that term by section 1206 of the Regulations;
"Canadian exploration expense" or “CEE” has the meaning assigned to that term by subsection 66.1(6);
"Canadian resource property" has the meaning assigned to that term by subsection 66(15);
“CCo” means XXXXXXXXXX, a predecessor corporation of the Company, which was formed by a vertical short-form amalgamation under the Canada Business Corporation Act among XXXXXXXXXX, (a predecessor of CCo) and two of its subsidiaries (XXXXXXXXXX) on XXXXXXXXXX;
“Deposit” means the XXXXXXXXXX deposit located on the Property;
“DCo” means XXXXXXXXXX;
“flow through critical mineral mining expenditure” has the meaning assigned to that term by subsection 127(9);
“flow through mining expenditure” has the meaning assigned to that term by subsection 127(9);
“flow-through shares” or “FTS” has the meaning assigned to that term by subsection 66(15);
“km” means kilometre;
"mineral resource" has the meaning assigned to that term by subsection 248(1);
"m" means metre;
“M” means millions of Canadian dollars;
“Mine A” means XXXXXXXXXX, as described in Paragraph 10;
“Mine B” means XXXXXXXXXX, as described in Paragraph 11;
XXXXXXXXXX;
“Paragraph” means a numbered paragraph of this letter;
"principal-business corporation" has the meaning assigned to that term by subsection 66(15);
"Property" means XXXXXXXXXX, as described in Paragraph 5;
“Project” means XXXXXXXXXX which involves the exploration of the Deposit conducted on the Property;
"public corporation" has the meaning assigned to that term by subsection 89(1);
“Road” has the meaning assigned by Paragraph 34;
“specified temporary access road” has the meaning assigned to that term by Regulation 1104(2);
"taxable Canadian corporation" has the meaning assigned to that term by subsection 89(1);
“taxation year” has the meaning assigned by subsection 249(1); and
XXXXXXXXXX.
II. BACKGROUND AND FACTS
1. The Company exists under the Canada Business Corporations Act and is a public corporation with its shares listed on the XXXXXXXXXX.
2. The Company is a taxable Canadian corporation and a principal business corporation. The taxation year end of the Company is XXXXXXXXXX and its business number is XXXXXXXXXX.
3. The Company is a diversified mining company with long life assets in XXXXXXXXXX. The growth strategy is focused on exploration, development, operation, and optimization of properties already under its control as well as other mineral assets it may acquire.
4. The Company currently owns and operates XXXXXXXXXX. The Company recently announced an expanded exploration program on several other properties it owns within the XXXXXXXXXX, including the Property.
The Property
5. The Property is located in XXXXXXXXXX.
6. The Property covers XXXXXXXXXX.
7. The Property is owned 100% by the Company.
8. No minerals or metal production has occurred to date on the Property.
9. Exploration is the only mining activity previously carried on at the Property.
10. The Property is located approximately XXXXXXXXXX of Mine A XXXXXXXXXX. Mine A is the Company’s only operating in XXXXXXXXXX
11. The Property is located XXXXXXXXXX km XXXXXXXXXX of Mine B, which is owned by the Company. Mine B was fully mined and closed in XXXXXXXXXX
12. No other operating mines are located in the vicinity of the Property.
13. The Property has no shared infrastructure with any mine, current or historic, in the area.
Past Exploration and Mergers and Acquisitions
14. The Property was first acquired in the early XXXXXXXXXX.
15. Previous exploration has been carried out on this property by ACo, BCo and CCo.
16. BCo entered into an option agreement on the Property in XXXXXXXXXX (from CCo) and completed numerous geophysical surveys and drilled XXXXXXXXXX.
17. On XXXXXXXXXX, BCo obtained a 43-101 complaint technical report providing an updated mineral resource estimate, which was prepared by DCo.
18. On XXXXXXXXXX, CCo acquired all of the issued and outstanding common shares of BCo that it did not already own, as part of a court-approved plan of arrangement. In doing so, BCo became a wholly-owned subsidiary of CCo on XXXXXXXXXX.
19. On XXXXXXXXXX, CCo amalgamated with BCo and other corporations to form the Company. Following the amalgamation, the Company directly holds all of BCo’s mineral properties and other assets.
20. The Company completed a XXXXXXXXXX in XXXXXXXXXX, with crews travelling from XXXXXXXXXX.
21. Outside of the XXXXXXXXXX, no additional exploration has been conducted related to the Project as the area is difficult to access due to XXXXXXXXXX, thus limiting the geophysical penetration of earlier systems.
Future Planned Exploration Program
22. The Company has announced further diamond drilling on known mineralized lenses as well as follow up on any borehole electromagnetic or surface electromagnetic anomalies within the Project.
23. The proposed exploration includes XXXXXXXXXX.
24. Diamond drilling is proposed on known mineralized lenses as well as follow up on any borehole electromagnetic or surface electromagnetic anomalies within the Project.
25. The purpose of the planned exploration is to further determine the quality and extent of the Deposit.
26. The planned drilling program is not expected to result in revenues.
27. To complete the diamond drilling, a temporary access road needs to be built to allow easier and less costly mobilization of equipment to the drill sites given the existing access road is only accessible seasonally by four-wheel drive vehicles.
Existing Access to the Property
28. XXXXXXXXXX.
29. Approximately XXXXXXXXXX.
30. XXXXXXXXXX.
31. The Deposit is located at XXXXXXXXXX.
32. XXXXXXXXXX.
33. XXXXXXXXXX.
III. PROPOSED TRANSACTIONS
Proposed Temporary Access Road
34. A new temporary access road (the “Road”) will be built to allow access to the Deposit via XXXXXXXXXX, rather than entering from the distant XXXXXXXXXX of the Property (via XXXXXXXXXX).
35. The Road to be constructed will be approximately XXXXXXXXXX km in length and will have an approximate XXXXXXXXXX m wide road top. The Road will be gravel and constructed of compacted limestone and similar materials. Road gradients will not exceed XXXXXXXXXX%.
36. The Road will be constructed with borrowed granular materials and geotextile materials where conditions warrant. These materials will be infilled with typical granular materials borrowed from sources nearby.
37. The Road will begin at an existing XXXXXXXXXX at its westerly end and its alignment will be generally easterly towards XXXXXXXXXX, approximately XXXXXXXXXX.
38. The XXXXXXXXXX m width of the Road will accommodate one way traffic only. It is not sufficient to accommodate two way traffic which would require a road to be XXXXXXXXXX m wide.
Use of the Road
39. The Company expects that XXXXXXXXXX% or more of the use of the Road will be for exploration purposes relating to the Deposit. For example, the Road will allow for safer and faster access to the Deposit for both equipment and people and for any supplies needed to be brought to the Deposit via a year-round road XXXXXXXXXX. The Road might also be used by contractors to conduct surveys, including geophysical probing and environment control sampling.
40. Similarly, crews are currently housed offsite, and travel XXXXXXXXXX km to access the Deposit via the XXXXXXXXXX when seasonally permitted. Access from XXXXXXXXXX via the Road will reduce travel to XXXXXXXXXX km.
41. There is currently no other exploration being conducted in the area. In the future, if exploration is conducted on other claims located on the Property, the Road may also be used to access those sites for further exploration.
42. The Road is not being constructed to support development activity, as no such activity has been undertaken, or is planned to be undertaken to date.
43. Should a future mine development decision be made, the Road would have to be widened and upgraded to provide for two-way traffic required to support a mine operation.
44. The Company does not expect that the Road will be used by other taxpayers.
Flow Through Shares
45. The total estimated cost of the Road is $XXXXXXXXXX and is expected to be fully funded by the proceeds from an issuance of flow through shares.
46. If sufficient flow-through share capital is not raised to cover the full cost of the Road, alternative sources of cash will be used to fund the shortfall.
Additional Permitting
47. The Company expects to apply for additional exploration permits in connection with an enhanced exploration program on the Property. This additional exploration permitting would cover the construction of the Road.
Ongoing Maintenance of the Road
48. The Road would need to be maintained for seasonal impacts, vegetation growth and erosion. Without such maintenance, the Road would only be useable in the summer season and would not be expected to last beyond three years.
49. There is not currently a plan to maintain the Road past the current exploration phase.
V. PURPOSE OF THE PROPOSED TRANSACTIONS
The Proposed Transactions are being undertaken for the purpose of conducting an exploration and mineral resource evaluation program in order to determine the existence, location, extent and quality of the Deposit that would be expected to be mined by creating new underground mining infrastructure and using underground mining methods.
The objectives of the Company are as follows:
• Discovering and defining higher-grade mineralization;
• In certain areas increasing drill spacing to upgrade inferred and/or indicated resource to indicated or measured; and
• Testing priority targets that have resulted from new geological modelling.
VI. RULING
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, additional information, further representations and purpose of the Proposed Transactions, and provided further that the Proposed Transactions are carried out as described above, subject to our Comments below our ruling is as follows:
An expense incurred by the Company in building the Road as described in the Proposed Transactions for the purpose of determining the existence, location, extent or quality of a mineral resource in the Deposit will qualify as CEE of the Company pursuant to paragraph (f) of the definition of CEE in subsection 66.1(6) provided that such expense:
a. is not a CDE;
b. is not incurred before a new mine in the mineral resource comes into production in reasonable commercial quantities, 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 all such expenses exceeds the total of those revenues;
c. is not reasonably considered to be related to a mine in the Deposit that has come into production in reasonable commercial quantities or to be related to a potential or actual extension of that mine; and
d. does not constitute the cost, or any part of the cost, of any depreciable property or Canadian resource property.
Expenses incurred in order to determine the economic feasibility of whether or not to proceed with developing a new mine, or that are related to the processing or sale of a mineral do not, in our view, satisfy the purpose test in paragraph (f) of the definition of CEE in subsection 66.1(6).
Except as expressly stated, the ruling provided herein does not imply acceptance, approval or confirmation of any income tax implications of the Background and 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;
b. except as specifically provided in our ruling, whether any particular expense incurred by the Company and described herein will qualify as a CEE, or whether any particular expense not considered to be a CEE qualifies as a CDE;
c. whether any particular expense renounced by the Company under FTS would qualify as a flow through mining expenditure or a flow through critical mineral mining expenditure;
d. whether any particular expense incurred by the Company that qualifies as a CEE or a CDE will be a CEDOE;
e. whether the Company meets the definition of principal-business corporation;
f. whether any shares or rights issued qualify as FTS; and
g. the determination of the fair market value or adjusted cost base of any property referred to herein.
The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R12 dated April 1, 2022, and is binding on the CRA to the extent that the Proposed Transactions are implemented as described above by no later than XXXXXXXXXX. The above ruling is based on the law as it presently reads and it does not take into account any proposed amendments to the Act.
If the Facts, the Proposed Transactions or the Additional Information as described above change after the date of this letter and prior to the completion of the Proposed Transactions, the ruling provided may not apply unless a subsequent ruling is issued.
Although we received, for review, certain documents relating to the Proposed Transactions, our ruling is based solely on the facts and representations contained herein.
Yours truly,
XXXXXXXXXX,
Manager
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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