Revenue Canada’s treatment of farm-ins not about to change

In the latter part of 1989, some uncertainty arose about the status of Revenue Canada’s treatment of farm-ins, evidently because a district taxation office in Western Canada veered somewhat from its traditional approach to farm-ins. The district office was simply trying to bring its practice in line with Revenue Canada’s long- standing practice. Nevertheless, this correction of a local administrative practice raised questions as to whether Revenue Canada was changing its treatment of farm-ins Canada-wide.

A Revenue Canada official has confirmed that the department has not changed its administrative practice with respect to farm-ins, and has no definitive plans to do so.

Revenue Canada’s treatment of farm-ins has always resembled more of an accommodation to reflect a type of deal or arrangement that is common to the mining industry than a pure technical interpretation of the legislation. From a technical viewpoint, a farm-in could be interpreted as a transaction involving a disposition of property, since a farm-in usually entails a transfer of title to a portion of the ownership of a resource property.

Where there is a disposition of property, proceeds of disposition and a cost of acquisition should normally be recognized. If this was the case, then all or a portion of the farmee’s cost of earning an interest in the property would be treated as a cost of property (eligible for a 30% writeoff), instead of being treated as “Canadian exploration expense” (CEE), which is eligible for a 100% writeoff.

However, many years ago Revenue Canada adopted the administrative position that a farm-in does not ordinarily involve a need to recognize proceeds of disposition and a cost of acquisition of a resource property, even though there is a transfer of title. Typically, the taxpayer who incurs exploration or development expenses to earn an interest in another taxpayer’s property is considered to have incurred CEE for income tax purposes, and is not considered to have incurred a property acquisition cost.

Revenue Canada has always recognized that some taxpayers might be tempted to take advantage of this administrative practice by trying to effect a property transfer without having to record proceeds of disposition or cost of acquisition. Accordingly, it has always been Revenue Canada’s practice in the mining industry to deny its administrative treatment of farm-ins, and to resort to the more technical interpretation, where: * the farm-in involves a transfer of property (such as machinery and equipment) other than resource property (that is, mining claims and similar exploration rights, etc.); or * the farm-in is a “widespread” farm-in.

Generally speaking, a widespread farm-in is one where the farmee earns an interest in a property other than the one on which he incurs exploration or development expenses.

Insofar as the Canadian Exploration Incentive Program is concerned, the Ministry of Energy, Mines and Resources has relied on Revenue Canada’s administrative practice with respect to farm-ins in determining whether the expenditures in question qualify as CEE or as property acquisition costs. Thus, Revenue Canada’s treatment has a direct bearing on flow-through share deals involving farm-ins.006 Robert Parsons is director and chairman of the finance and taxation committee, Prospectors and Developers Association of Canada.