2019-0826011R3 Underground Mine

Principal Issues: Whether expenses to be incurred by the taxpayer as part of a proposed exploration program will qualify as Canadian exploration expenses pursuant to para. (f) of that definition.

Position: Yes.

Reasons: Based on the NRCan Opinion and the related jurisprudence, the expenses will meet para. (f) of the CEE definition.

Author: XXXXXXXXXX
Section: 66.1(6)“Canadian exploration expense”(f)

XXXXXXXXXX                                                                                 2019-082601

XXXXXXXXXX, 2020

Dear XXXXXXXXXX:

Re:    Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX and your subsequent correspondence in which you requested an advance income tax ruling (a “Ruling”) on behalf of the above noted taxpayer (the “Company”).

To the best of the knowledge of the Company and that of the taxpayers involved, none of the proposed transactions 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:

A.    being considered by the Canada Revenue Agency (the “CRA”) in connection with such return; 

B.    under objection by the Company or a related person; or

C.    the subject of a current or completed court proceeding involving the Company or a related person; or

(b)    the subject of a ruling request previously considered by the Income Tax Rulings Directorate in relation to the Company or a related person.

Unless otherwise noted, all statutory references herein are to the provisions of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, together with the regulations thereto.

I.    DEFINITIONS

In this letter, the following terms or expressions have the meanings specified:

“Canadian development expense” or “CDE” has the meaning assigned to that term by subsection 66.2(5);

“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);

“Deposit” means the XXXXXXXXXX deposit located within Property A;

“depreciable property” has the meaning assigned to that term by subsection 13(21);

“flow-through share” has the meaning assigned to that expression by subsection 66(15);

“km” means kilometre;

“mineral resource” has the meaning assigned to that term by subsection 248(1);

“Mt” means million tonnes;

XXXXXXXXXX;

“principal-business corporation” has the meaning assigned to that term by subsection 66(15);

“Project” means the XXXXXXXXXX;

“Property A” means the XXXXXXXXXX;

“Property B” means the XXXXXXXXXX; 

“NRCan” means Natural Resources Canada;

“public corporation” has the meaning assigned to that term by subsection 89(1);

“related person” has the meaning assigned to that term by subsection 251(2);

“taxable Canadian corporation” has the meaning assigned to that term by subsection 89(1);

“tpd” means tonnes per day; and 

XXXXXXXXXX.

II.    FACTS

Company Information

1.    The Company was incorporated under the laws of the Province of XXXXXXXXXX.  The Company’s common shares are listed for trading on the XXXXXXXXXX Stock Exchange under the trading symbol XXXXXXXXXX.

2.    The Company is a taxable Canadian corporation, a public corporation and a principal-business corporation.  The taxation year of the Company ends on XXXXXXXXXX and its business number is XXXXXXXXXX.

3.    The Company’s main business activities consist of the exploration and development of mineral interests. The Company’s principal assets consist of the Project and its XXXXXXXXXX. 

The Project

4.    The Project is located XXXXXXXXXX.

5.    The Project is comprised of XXXXXXXXXX federal mining leases and XXXXXXXXXX federal mining claims covering approximately XXXXXXXXXX.  

6.    The Project is divided into the following properties: (a) Property A; (b) Property B; XXXXXXXXXX.

7.    Property A hosts the Deposit as well as the XXXXXXXXXX deposits and Property B (located approximately XXXXXXXXXX of Property A) hosts XXXXXXXXXX known XXXXXXXXXX deposits.

8.    Property A is comprised of XXXXXXXXXX mineral leases and XXXXXXXXXX mining claims that cover approximately XXXXXXXXXX. 

The Deposit

9.    The federal mineral lease XXXXXXXXXX covers XXXXXXXXXX including the Deposit.

10.    The Deposit is a continuous, massive deposit with a XXXXXXXXXX. The Deposit extends to a depth of XXXXXXXXXX below surface. 

11.    The Deposit is made up of two components: a surface deposit with a potential open-pit mine plan; and an underground deposit with a potential “post pillar cut-and-fill” underground mine plan. 

a.    XXXXXXXXXX percent of the resource in the open pit is in the measured category while the underground resource is predominantly drilled to inferred and indicated, with minimal measured resources occurring immediately below the open pit resources. 

b.    The underground mineral reserves in the Deposit consist of XXXXXXXXXX of probable mineral reserves and XXXXXXXXXX of proven mineral reserves.

12.    Based on current exploration results, it appears that the Deposit’s XXXXXXXXXX are located in XXXXXXXXXX. 

Past Exploration Activities

13.    The Company purchased the Project in XXXXXXXXXX and has conducted several exploration campaigns on the Project’s properties. To date, there has been XXXXXXXXXX of the Project’s properties or deposits.

14.    Exploration, including drilling, has occurred on Property A in XXXXXXXXXX in which the Company owned it. 

15.    In XXXXXXXXXX, the Company completed XXXXXXXXXX National Instrument 43-101 compliant technical reports and initial feasibility studies on the Project. XXXXXXXXXX.

16.    The XXXXXXXXXX concluded that the Project would be economically viable under the base case financial parameters and recommended that the Project be advanced to construction through the normal process of permit acquisition, financing detailed engineering and construction.

17.    However, the Company decided not to advance to construction and instead to continue exploring Property A. Additionally, the Company continued to advance the Project with the completion of an environmental assessment process and advanced and/or completed other required permits and approvals, including land tenure and XXXXXXXXXX.  Further, the Company completed site improvements including XXXXXXXXXX which provide improved site access and logistics for future activities, such as the proposed underground ramp construction described in paragraphs 24-30 below. 

18.    Since XXXXXXXXXX, the Company has continued exploration work including drilling and field exploration. 

a.    During the XXXXXXXXXX exploration season, the Company drilled new targets that had near-surface mineralization and had not been previously drilled; the underground Deposit was not drilled. 

b.    The XXXXXXXXXX exploration seasons targeted the Deposit during the drilling program (along with a few other areas). Specifically, the drilling focused on the XXXXXXXXXX.

c.    Drilling during XXXXXXXXXX illustrated that the XXXXXXXXXX.

19.    This recent focus on the XXXXXXXXXX of the underground Deposit XXXXXXXXXX has highlighted the considerable potential for positive resource optimization within the current resource at the Deposit.  The strike length of the underground structure has an extent over XXXXXXXXXX with vertical depth of over XXXXXXXXXX in the vicinity of the XXXXXXXXXX.

20.    Limited exploration drilling from XXXXXXXXXX and updated geologic modelling that resulted from this new drilling indicated that mineralization is XXXXXXXXXX.

21.    Updated geologic modelling and targeting exercises have also highlighted priority exploration targets in XXXXXXXXXX. 

Exploration Recommended by the Company’s Exploration Team

22.    For the continued underground exploration within and around the Deposit, the geologists on the Company’s exploration team recommended to continue the delineation drill testing of the XXXXXXXXXX mineralization within the existing resource along the XXXXXXXXXX and towards the open pit.  The geologists on the Company’s exploration team also recommended the Company systematically drill test additional priority structural targets that have been identified as under-explored. 

III.    PROPOSED TRANSACTIONS

The following is a description of the proposed underground exploration program with respect to the Deposit:

23.    To advance underground exploration in and around the Deposit, the Company will have to determine the extent of the reserve in the underground Deposit. Surface drilling is impractical for these purposes due to the depth of the drilling required which makes it very difficult to drill with accuracy and would be very costly.

24.    Underground exploration will be facilitated by the development of an underground ramp which will provide underground access for diamond drilling and sampling.  Underground drilling platforms would be created so exploration drilling could occur concurrently with ramp development. XXXXXXXXXX. 

25.    The ramp is intended to go to a depth of XXXXXXXXXX from surface and would be approximately XXXXXXXXXX in length. The ramp decline will be at an aggressive -XXXXXXXXXX% so as to gain access to exploration drill site locations as quickly as possible. XXXXXXXXXX.  

26.    The underground access provided by the ramp will allow for the establishment of underground diamond drilling positions that will give better precision by target testing, mitigate technical risk for hole failure and shorten drill time requirements by reducing length of drill holes and lower ultimate drilling costs.

27.    Drilling in the area will target vertical depths from surface ranging from XXXXXXXXXX from underground access points and will focus on exploration and resource targets. 

28.    Drilling from underground access points would be completed using standard underground drilling equipment from predetermined levels with one drill set up point facilitating in most cases several drill holes.

29.    The Company anticipates that over XXXXXXXXXX drill holes would be required throughout the duration of the exploration program totaling up to XXXXXXXXXX of drilling. Drill holes would be sequenced during advancement of the ramp in a strategic manner to ensure maximum drilling production during ramp advancement. The benefits from underground ramp optimization drilling are:

(a)    control of deviation; 

(b)    shorter diamond drill lengths;  and

(c)    faster diamond drilling.

30.    All permits for ramp construction and exploration drilling are in place and the Company anticipates that the exploration activities would commence in XXXXXXXXXX for a total cost in the range of $XXXXXXXXXX.

IV.    ADDITIONAL INFORMATION

31.    The Company has not identified any proven mineral reserves or probable mineral reserves at the underground Deposit other than those reported in the XXXXXXXXXX.

32.    The Company has not announced that any part of the Project is being brought into production and no positive decision has been made by the Company’s board of directors to bring any part of the Project into production.

33.    The Company is considering raising the funds for the proposed underground exploration work on the Deposit described in paragraphs 23 to 30 above, by issuing flow-through shares.

34.    The Company anticipates that the ramp will be also used in the future for mining operations if those commence. Specifically, the ramp may be used to bring ore up to the surface.

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 a new underground mining infrastructure and using underground mining methods.

The objectives of the Company with respect to the Proposed Transactions are as follows:

(a)    discovering and defining zones of XXXXXXXXXX mineralization; 

(b)    in certain areas increasing drill spacing to upgrade inferred and/or indicated resource to indicated or measured;

(c)    testing priority targets that have resulted from new and updated geologic modelling; and 

(d)    the processing of a bulk sample of reconciliation to geologic models and grade modeling.

VI.    RULING GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, additional information 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, after the date of this letter in respect of the exploration program described in paragraphs 23 to 30 above (including expenses for the ramp described in those paragraphs), for the purpose of determining the existence, location, extent or quality of a mineral resource in the underground Deposit will qualify as CEE of the Company pursuant to paragraph (f) of the definition of CEE in subsection 66.1(6) including such an expense incurred in the course of: 

(i)    prospecting; 

(ii)    carrying out geological, geophysical or geochemical surveys;

(iii)    drilling by rotary, diamond or percussion or other methods; or

(iv)    trenching, digging test pits and preliminary sampling;

but not including any expense that:

a)    is a CDE; 

b)    is described in (i), (iii) or (iv) above, and that is 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; or

c)    may reasonably be considered to be related to a mine in the mineral resource that has come into production in reasonable commercial quantities or to be related to a potential or actual extension of the mine; 

and not including any expense that constitutes the cost, or any part of the cost, to the Company of any depreciable property or Canadian resource property.

COMMENTS

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 Facts, Proposed Transactions or Additional Information. In particular, nothing in this letter should be interpreted as confirming either expressly or implicitly:

(a)    the reasonableness of any expenditure;

(b)    any tax consequences relating to the Facts, the Proposed Transactions or the Additional Information described herein other than those described in the ruling given above, including for greater certainty any tax consequences to any person other than the Company;

(c)    whether any particular expense incurred by the Company in respect of the exploration program described in the Proposed Transactions above will qualify as a CEE, or whether any particular expense not considered to be a CEE qualifies as a CDE;

(d)    the tax treatment of any expense incurred by the Company with respect to activities referred to in paragraph 17 including with respect to XXXXXXXXXX;

(e)    whether any particular expense incurred by the Company that qualifies as a CEE or a CDE will be a Canadian exploration and development overhead expense as this term is described in in paragraph 66(12.6)(b) and section 1206 of the Income Tax Regulations;

(f)    whether the Company is a principal-business corporation;

(g)    whether any share in the capital stock of the Company which may be issued as envisioned in paragraph 33 above will be a flow-through share; and

(h)    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 70-6R9 dated April 23, 2019, and is binding on the CRA provided that the Company commences implementing the Proposed Transactions as described above by no later than XXXXXXXXXX. The above ruling is based on the law as it presently reads and 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
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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, 2020

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, 2020