2016-0675902I7 Canadian exploration expense
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: Legislative amendment to paragraph (f) of the definition of CEE in ss. 66.1(2): Budget Implementation Act, 2016, No. 1, S.C. 2016, c. 7.
Position: Guidelines have been provided.
Reasons: Actual determination will depend on the facts of a particular situation.
Author:
Pinero, Veronica
Section:
paragraph (f) of the definition of CEE in ss. 66.1(6)
January 24, 2017
Mr. Gord Parr HEADQUARTERS
Director Income Tax Rulings Directorate
Large Business Audit Division
International and Large Business Directorate Veronica Pinero
André Payette
2016-067590
Recent amendment of para. (f) of the definition of CEE in ss. 66.1(6) and impact on the Guidelines
As requested, we have updated the “Guidelines for determining the tax treatment of certain exploration expenses” that was issued in 2007 (the “Guidelines”) to reflect legislative changes to the income tax treatment of certain community consultation expenses and environmental study expenses incurred by mining companies at the exploration stage after February 2015.
This updated version incorporates the recent legislative amendment to paragraph (f) of the definition of Canadian exploration expenses (“CEE”) in subsection 66.1(6) of the Income Tax Act introduced by the Budget Implementation Act, 2016, No. 1, S.C. 2016, c. 7. Consistent with the Guidelines, in order for any such expenditure to qualify as CEE, it must be incurred for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada (referred to in the attached table as the “purpose test”).
As noted when the original Guidelines were drafted, the Canada Revenue Agency’s consideration of this issue has been limited to an overall review of general principles. The actual treatment of a particular expense incurred by a taxpayer will depend on the particular facts of a given situation and, therefore, may differ from that outlined in the table.
Yours truly,
Fiona Harrison
Manager
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
cc: Jane Stalker
Industry Specialist Services – Resource Industry Section Coordinator
Large Business Audit Division
International and Large Business Directorate
Guidelines for Determining the Tax Treatment of Certain Exploration Expenses
Note: This table has been prepared to provide the guidelines that the Canada Revenue Agency will follow in determining whether environmental study expenses, community consultation expenses and feasibility study expenses that are incurred by mining companies at the exploration stage (i.e. for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada, hereinafter referred to as the “purpose test”) will qualify as Canadian exploration expenses (“CEE”). The table is intended as a guide only. The actual treatment of a particular expense incurred by a taxpayer will depend on the facts relevant to the particular situation and, therefore, may differ from that outlined in this table.
| Issue | Description of Expenses | Guideline |
Environmental studies | Environmental assessments undertaken to meet a legal or informal requirement to obtain a permit. | CEE as of March 1, 2015. Prior to March 1, 2015, not CEE as it is part of the cost of Canadian Resource Property (CRP), which is Canadian Development Expense (CDE) |
| Environmental assessments undertaken to meet a legal or informal obligation under the terms of the permit. | CEE where related to the permit providing for the exploration process (not part of the cost of a CRP) |
| Other environmental assessments conducted at the discretion of the taxpayer: |
|
| - environmental sampling/monitoring in relation to an exploration activity; | CEE |
| - targeted environmental assessments (e.g., vegetation, fisheries and water assessments) conducted in conjunction with a specific exploration activity; | CEE |
| - general baseline environmental assessments undertaken prior to carrying out a specific exploration activity. | Not CEE (does not meet purpose test) |
| Issue | Description of Expenses | Guideline
|
Community consultation | Consultation to assess community attitudes/community information program, undertaken prior to a decision to explore. | Not CEE (does not meet purpose test) |
| Consultation undertaken to meet a legal or informal requirement to obtain a permit. | CEE as of March 1, 2015. Prior to March 1, 2015, not CEE as it is part of the cost of CRP, which is CDE. |
| Consultation undertaken to meet a legal or informal obligation under the terms of the permit. | CEE where related to the permit providing for the exploration process (not part of the cost of a CRP) |
| Negotiation to secure surface access for exploration purposes (beyond the requirements for/of the permit). | CEE (where incurred in relation to the exploration process and not a broader purpose). |
| Negotiation with local community to secure certainty with respect to exploration operations (additional to requirement for/of a permit and where other party does not hold surface rights). | CEE (not part of the cost of a CRP) |
| Other consultation undertaken at the taxpayer’s discretion in respect of the: |
|
| - exploration process only; | CEE |
| - exploration and mining process; | CEE to the extent the expense meets purpose test |
Issue | Description of Expense | Guideline |
Feasibility studies | Preliminary planning for a potential exploration activity undertaken prior to a decision to explore. | Not CEE (does not meet purpose test) |
| Planning for, and studies relating to, the conduct of an exploration activity or some part thereof. | CEE |
| Physical and chemical assessments related to a deposit, with the objective of informing a decision whether to undertake more advanced exploration at the site. | CEE |
| Assessments of the physical and chemical characteristics of the deposit to assess its potential as a commercial deposit. | CEE |
| Assessments of mine development options and/or profitability of developing the deposit into a mine. | Not CEE (does not meet purpose test). |
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.
© Her Majesty the Queen in Right of Canada, 2017
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2017
Video Tax News is a proud commercial publisher of Canada Revenue Agency's Technical Interpretations. To support you, our valued clients and your network of entrepreneurial, small businesses, we choose to offer this valuable resource to Canadian tax professionals free of charge.
For additional commentary on Technical Interpretations, court cases, government releases, and conference materials in a single practical document specifically geared toward owner-managed businesses see the Video Tax News Monthly Tax Update newsletter. This effective summary and flagging tool is the most efficient way to ensure that you, your firm, and your clients are fully supported and armed for whatever challenges are thrown your way. Packages start at $400/year.