‘Principal Business Corporations’

19.A18. The distinction between exploration and development expenditure is preserved under Canadian legislation. Section 66 (15) (h) of the Income Tax Act defines a ‘principal business corporation’ as a corporation whose principal business is (i) production, refining or marketing of petroleum, petroleum products or natural gas or exploring or drilling for petroleum or natural gas; (ii) mining or exploring for minerals; (iii) processing mineral ores to recover metals therefrom; (iv) a combination of (iii) and processing metals recovered therefrom; (v) fabricating metals; or (vi) operating a pipeline for the transmission of oil or natural gas. A ‘principal business corporation’ is allowed to deduct the aggregate of its past exploration and development expenditure incurred in Canada up to a limit represented by the amount of net income for the taxable year before deduction of depletion allowances or losses carried forward, but reduced by deductible dividends received. The provision resembles section 122J of the Australian Act and includes in the base of capital expenditure deductible under this heading the cost of any ‘Canadian resource property’, including amounts paid for the acquisition of mining rights (whether oil, gas or minerals). Any such costs not deducted in the year may be carried forward indefinitely against income from future years.

19.A19. The provision applies to:

  • (a) the cost of searching and drilling for petroleum and natural gas; and
  • (b) the cost of prospecting, exploration or development expenditure incurred by a taxpayer in searching for minerals.

In Canada the Act accords different treatment to each of the above categories, since exploration and development expenditure incurred with regard to petroleum or natural gas is immediately deductible in the manner indicated above whereas in the case of general mining this provision relates only to exploration and other costs incurred up to the time of development of the mine for production. It appears that the oil and gas allowance is so framed because of the practical difficulty involved in distinguishing petroleum ‘exploration’ from ‘development’ expenditure.

Taxpayers Other than ‘Principal Business Corporations’

19.A20. The deduction for exploration and development expenditure is limited to the amount of income derived from the oil or gas well or mine or royalties therefrom, together with the amount by which a consideration received on sale of a mine exceeds the amount that would ordinarily be allowed as capital expenditure in respect thereof; alternatively, the limit is 20 per cent of the accrued undeducted exploration and development expenses if that amount exceeds the amount of income described above. (If the taxpayer's ‘income from Canadian resources’ is insufficient, he may deduct up to 20 per cent of the allowable expenditure from income derived from other sources.) A similar allowance is available for foreign exploration and development expenses.

19.A21. It will be observed that the provisions outlined above are directed towards enabling immediate write-off of exploration expenditure against income and this appears to have been prompted by the recognition that, in the words of the Carter

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Commission (1966): ‘The more uncertain the value of the asset created by a particular expenditure, the more rapidly the cost should be written off. Because the probability of success for a particular exploration venture is usually low, it is reasonable to deduct exploration costs immediately in determining income’.