On January 24, 2017, the Canada Revenue Agency (CRA) released an update to its "Guidelines for determining the tax treatment of certain exploration expenses" that were previously issued in 2007 (the Guidelines). This update is a result of the 2015 amendments to paragraph (f) of the definition of "Canadian exploration expense" (CEE) in subsection 66.1(6) of the Income Tax Act (Canada). The amendments expanded the definition of CEE to include the costs of certain environmental studies and community consultations.
The Guidelines provide insight into how CRA will determine whether environmental study expenses, community consultation expenses and feasibility study expenses that are incurred by mining companies at the exploration stage will qualify as CEE.
Generally, expenses that are incurred for the purpose of determining the existence, location, or quality of a mineral resource in Canada can qualify as CEE and are 100% deductible by a mining company, or are eligible for renunciation to investors who subscribe for flow-through shares. The tax treatment of CEE provides a valuable tax incentive to investors and companies in the mining sector at the exploration stage.
The Guidelines confirm that environmental assessments and community consultations undertaken to meet a legal or informal requirement to obtain a permit will qualify as CEE as of March 1, 2015. Prior to March 1, 2015, these expenses did not qualify as CEE but were instead considered to be Canadian development expenses. Other expenses incurred for environmental studies, community consultations and feasibility studies that qualified as CEE before the amendments continue to qualify as CEE.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
