2019-0831981E5 CDE and Pre-Production Revenues

Principal Issues: Are taxpayers entitled to net pre-production revenues against expenses that fall within paragraph (c.2) of the definition of "Canadian development expenses" in subsection 66.2(5)?

Position: No

Reasons: Such netting is not supported by a textual, contextual and purposive analysis of that provision.

Author: Wharram, Kimberley
Section: Paragraphs 66.2(5)(c.2), 66.1(6)(g), (g.3) and (g.4).

XXXXXXXXXX                                                                                                    2019-083198
                                                                                                                            André Payette

May 3, 2021

Dear XXXXXXXXXX

We are writing in response to your letter dated November 26, 2019 regarding the income tax  treatment of revenues earned while a mine is in the development phase and before the mine comes into production in reasonable commercial quantities (“Pre-Production Revenues”). More specifically, you asked us whether such Pre-Production Revenues could be netted against expenses included in a taxpayer’s Canadian development expenses under paragraph (c.2) of the definition “Canadian development expenses” in subsection 66.2(5) of the Income Tax Act (Canada) (the “Act”).

Legislative Background

Expenses incurred by a taxpayer for the purpose of bringing a new mine in a mineral resource in Canada into production in reasonable commercial quantities (“Mine Development Expenses”) were historically included in a taxpayer’s Canadian exploration expenses under paragraph (g) of the definition “Canadian exploration expenses” in subsection 66.1(6) (the “CEE Provision”), (footnote 1)   which reads as follows:

(g) any expense incurred by the taxpayer after November 16, 1978 and before March 21, 2013 for the purpose of bringing a new mine in a mineral resource in Canada, other than a bituminous sands deposit or an oil shale deposit, into production in reasonable commercial quantities and incurred before the new mine comes into production in such quantities, including an expense for clearing, removing overburden, stripping, sinking a mine shaft or constructing an adit or other underground entry, but not including any expense 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,
                                                  [emphasis added]

However, as a result of amendments announced in Budget 2013, Mine Development Expenses are now included in a taxpayer’s Canadian development expenses under paragraph (c.2) of the definition “Canadian development expenses” in subsection 66.2(5) (the “CDE Provision”), which reads as follows:

(c.2) any expense, or portion of any expense, that is not a Canadian exploration expense, incurred by the taxpayer after March 20, 2013 for the purpose of bringing a new mine in a mineral resource in Canada, other than a bituminous sands deposit or an oil shale deposit, into production in reasonable commercial quantities and incurred before the new mine comes into production in such quantities, including an expense for clearing, removing overburden, stripping, sinking a mine shaft or constructing an adit or other underground entry,

As you noted in your letter, the wording of the CDE Provision is essentially identical to the wording of the CEE Provision, except for the underlined portion of the CEE Provision which deals with expenses that result in, or that can reasonably be expected to result in, Pre-Production Revenues.

Issue

You have asked whether, instead of including Pre-Production Revenues in computing income from a business under section 9 of the Act, Pre-Production Revenues may instead be netted against expenses included by the taxpayer as CDE under the CDE Provision?

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation. 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 IC70-6R11, Advance Income Tax Rulings and Technical Interpretations.

In Canada Trustco Mortgage Co. v. R., [2005] 5 C.T.C. 215 (S.C.C.) the Supreme Court of Canada indicated that a textual, contextual and purposive approach should be adopted when interpreting income tax legislation.

From a textual perspective, there is no wording within the CDE Provision (or otherwise within the Act) that expressly permits the reduction of CDE by Pre-Production Revenues. 

From a contextual perspective, although the CDE Provision does not expressly permit the netting of Pre-Production Revenues against CDE, the netting of Pre-Production Revenues against CEE is expressly contemplated in the CEE Provision, as well as in subparagraph (f)(v.1) of the definition of CEE. The fact that other provisions of the Act expressly contemplate the netting of Pre-Production Revenues against other expenditures strongly indicates that such netting should not be permitted in circumstances, such as under the CDE Provision, where it is not expressly contemplated.

From a purposive perspective, it is necessary to consider whether permitting the netting of Pre-Production Revenues against CDE would further the object and spirit of the CDE Provision. The CDE Provision was added as part of Budget 2013 which introduced a number of changes to various mining incentives in the Act. Annex 2: Tax Measures Supplementary Information, which was included as part of the Budget 2013 materials, described the overall purpose for these changes:

Budget 2013 proposes changes to better align the deductions available for expenses in the mining sector with those available in the oil and gas sector.

The same document then went on to specifically describe the introduction of the CDE Provision as follows:

Pre-Production Mine Development Expenses

Pre-production mine development expenses refer to intangible expenses (e.g., expenses for removing overburden or sinking a mine shaft) incurred for the purpose of bringing a new mine for a mineral resource located in Canada into production in reasonable commercial quantities. These expenses are treated as Canadian exploration expense (CEE) and may be deducted in full in the year incurred or carried forward indefinitely for use in future years. In contrast, intangible mine development expenses incurred after a mine comes into production are treated as Canadian development expense (CDE) and are deductible at a rate of 30 per cent per year on a declining-balance basis. In the oil and gas sector, intangible pre- and post-production development expenses are both treated as CDE.

Budget 2013 proposes that pre-production mine development expenses, as described in paragraph (g) of the definition CEE in subsection 66.1(6) of the Income Tax Act, be treated as CDE.

Based on the foregoing, the purpose for the introduction of the CDE Provision was to better align the tax treatment of pre-production mining expenditures with the tax treatment of pre-production oil and gas expenditures.

Paragraph (a) of the definition of CDE, which addresses pre-production oil and gas expenditures, does not contemplate the netting of any Pre-Production Revenues against expenses included in CDE. Therefore, permitting the netting of Pre-Production Revenues against expenses included in CDE under the CDE Provision would not be consistent with the purpose of better aligning the tax treatment of pre-production mining expenditures with the tax treatment of pre-production oil and gas expenditures. Instead, it would provide taxpayers that have incurred pre-production mining expenditures with better tax treatment than the tax treatment available to taxpayers that have incurred pre-production oil and gas expenditures.

As a result, there is no basis to permit the netting of Pre-Production Revenues against CDE based on a textual, contextual and purposive analysis of the CDE Provision.

Yours truly,

Kimberley Wharram
Manager
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch

FOOTNOTES

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

1  Mine Development Expenses incurred after November 16, 1978 and before March 21, 2013 were eligible as CEE under paragraph (g) of the definition of CEE. As a result of transitional rules set out in paragraphs (g.3) and (g.4) of the definition of CEE, a portion of Mine Development Expenses incurred between March 21, 2013 and December 31, 2017 were eligible for CEE treatment.

UNCLASSIFIED

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