29 March 1994 External T.I. 9335695 - MINING FARM-OUT

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:

Treatment of mining "typical farm-out" where mining assets a part of farm-out expenses.

Position TAKEN:

Administrative position described in paragraph 11 of IT-125R3 is extended to "typical farm-outs" in mining.

Reasons FOR POSITION TAKEN:

	Question 27 Canadian Tax Foundation 1993 Conference 	Round Table.

XXXXXXXXXX 5-933569

Attention: XXXXXXXXXX

March 29, 1994

Dear Sirs:

Re: Mining Farm-out

This is in reply to your letter of December 6, 1993 wherein you ask for our views concerning a farm-out transaction leading to the development of a mine.

Unless otherwise stated, all references to statute are to the Income Tax Act S.C. 1970-71-72,c.63 as amended, consolidated to June 10, 1993 (the "Act").

In 1992, the Department's answer to Question 16 at the 1992 Canadian Petroleum Tax Society Conference Round Table announced that where a farmee incurs exploration, development and "equipping costs" in return for all of the farmor's working interest in the unproven resource property, the IT-125R3 paragraph 11 administrative position for non-taxable farm-out treatment would be applied. "Equipping costs" were described as the cost of equipment acquired to be used at the wellsite primarily for the purpose of producing petroleum substances from a completed well. The meaning of "equipping costs" for the purpose of mining farm-out transactions has not been determined.

The Department's answer to Question 27 at the 1993 Canadian Tax Foundation Round Table states that the administrative position described in paragraph 11 of IT-125R3 will also be extended to "Typical farm-outs" in the mining industry.

If you have an actual situation involving a proposed farm-in to a mine, we can consider it in the form of a request for an advance income tax ruling.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 21 of Information Circular 70-6R2, the above comments do not constitute an advance income tax ruling and accordingly are not binding on the Department.

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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