2017-0733221E5 Income Inclusion for Prospectors

Principal Issues: (1) Whether a prospector is required to declare the shares received on a transfer of mining property to which section 35 applies before they are sold; (2) If so, how the receipt of shares is declared; and (3) Whether there are any prescribed forms for the declaration of the shares received.

Position: (1) No; (2) Not applicable; and (3) No.

Reasons: (1) There is no provision in the Income Tax Act or the Income Tax Regulations that requires the declaration of shares received on a transfer of mining property to which section 35 applies; (2) Not applicable; and (3) There is no prescribed form. Nevertheless, taxpayers are required by subsection 230(1) of the Act to maintain books and records in such form and containing such information as will enable the taxes payable under the Act to be determined.

Author: Payette, André
Section: section 35, subsection 230(1)

XXXXXXXXXX                                                                                    2017-073322
                                                                                                            A. Payette
                                                                                                            (450) 926-7592
June 11, 2018

Dear XXXXXXXXXX

Re: Income Inclusion for Prospectors

This is in response to your email of November 9, 2017 wherein you requested our interpretation of the provisions of section 35 of the Income Tax Act (Canada) (the “Act”) in a situation where an individual who is a prospector receives shares of a Canadian corporation (“Canco”) in exchange for an interest in a Canadian mining property. In your email, you ask whether the individual is required to declare the shares received from Canco before they are sold and, if so, how the receipt of the shares would be declared and whether there are any prescribed forms for making such a declaration.

Our Comments

This technical interpretation provides general comments about the provisions of the Act.  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Overview of Section 35

Subsection 35(1) of the Act provides special rules where, in general terms, an individual who is a prospector (footnote 1) acquires shares of a corporation in exchange for the disposition to the corporation of a property (or interest therein) (a “mining property”) that is a right, licence or privilege to prospect, explore, drill or mine for minerals in a mineral resource in Canada, or that is a real property or an immovable in Canada (other than depreciable property) the principal value of which depends upon its mineral resource content, where such property was acquired as a result of the individual’s efforts as a prospector. In circumstances where subsection 35(1) of the Act is applicable, no amount is required to be included in the individual’s income at the time that the shares are acquired and the cost of the shares to the individual is nil.  When the individual disposes of or exchanges the shares there will, in most cases, be two distinct income inclusions:

(i)   paragraph 35(1)(d) of the Act requires that the individual include in income an amount equal to the lesser of the fair market value of the shares at the time of their acquisition and the fair market value of the shares at the time of their disposition or exchange.  The individual is then entitled under paragraph 110(1)(d.2) of the Act to a deduction in computing taxable income equal to one-half of the amount which has been included in the individual’s income under paragraph 35(1)(d) of the Act. By virtue of subsection 52(1), the lesser of the fair market value of the shares at the time of their acquisition and the fair market value of the shares at the time of their disposition or exchange will be added to the cost of the shares of the taxpayer; and

(ii)  in many cases, the fair market value of the shares at the time of their disposition or exchange by the individual will be greater than their fair market value at the time that they were acquired.  The gain represented by any such increase in value may be fully includable in income, or may be a capital gain, one half of which is included in income for tax purposes. The amount of such gain will be determined as the proceeds or selling price, net of any selling costs, less the amount included in the income of the individual under paragraph 35(1)(d) of the Act (see (i) above).  The determination of whether such gain is on income or capital account will depend upon a review of the facts of a particular situation.

Reporting of Transfer of Mining Property for Shares

There is no prescribed form for declaring a disposition by an individual of a mining property in return for shares to which subsection 35(1) would apply, nor is there any specific provision in the Act or the Income Tax Regulations that requires the reporting of this disposition.  Nevertheless, taxpayers are required by subsection 230(1) of the Act to maintain books and records in such form and containing such information as will enable the taxes payable under the Act to be determined.  In addition, as indicated in paragraph 6 of Information Circular IC 78-10R5 - Books and Records Retention/Destruction (“IC 78-10R5”), such books and records must also be supported by source documents that verify the information in the books and records.  Paragraph 7 of IC 78-10R5 states that a source document includes "items such as sales invoices, purchase invoices, cash register receipts, formal contracts, credit card receipts, delivery slips, deposit slips, work orders, dockets, cheques, bank statements, tax returns, and general correspondence whether written or in any other form".

Therefore, where an individual transfers a mining property to a corporation in return for shares of the corporation in circumstances to which subsection 35(1) of the Act would apply, the individual should retain copies of all source documents relating to the transfer and otherwise maintain books and records that would be sufficient to allow the individual to report the tax consequences that will arise under the Act on the disposition or exchange of the shares as described above.  This would include information relating to the fair market value of the shares at the time they are acquired by the individual.

We trust that our comments will be of assistance.

Yours truly,

Kimberley Wharram
Acting Manager
Reorganizations and Resources Division
Income Tax Rulings Directorate

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  “Prospector” is defined in subsection 35(2) of the Act as an individual who prospects or explores for minerals or develops a property for minerals on behalf of the individual, on behalf of the individual and others or as an employee.

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