Norzinc (NORZF) 20-F 2010 FY Annual report (foreign)

Financial Statements

(A Development Stage Company)

December 31, 2009, 2008 and 2007

Index

1

Independent Auditors’ Report on Financial Statements

To the Shareholders of

Canadian Zinc Corporation

We have audited the balance sheets of Canadian Zinc Corporation [the “Company”] as at December 31, 2009 and 2008 and the statements of operations, comprehensive loss and deficit, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2009 and 2008 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2009 in conformity with Canadian generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 26, 2010 expressed an unqualified opinion thereon.

“ERNST & YOUNG LLP”

Chartered Accountants

Vancouver, Canada

March 26, 2010

2

Independent Auditors’ Report on Internal Controls under Standards of the Public Company Accounting Oversight Board (United States)

To the Shareholders of

Canadian Zinc Corporation

We have audited Canadian Zinc Corporation’s [the “Company”] internal control over financial reporting as at December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission [the “COSO criteria”]. The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations o f management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009 based on the COSO criteria.

We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the balance sheets as at December 31, 2009 and 2008 and the statements of operations, comprehensive loss and deficit, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2009 of the Company and our report dated March 26, 2010 expressed an unqualified opinion thereon.

“ERNST & YOUNG LLP”

Chartered Accountants

Vancouver, Canada

March 26, 2010

3

CANADIAN ZINC CORPORATION

(a development stage company)

Balance Sheets

(Prepared in accordance with Canadian generally accepted accounting principles)

(in thousands of Canadian dollars)	December 31, 2009				December 31, 2008
				$	$
ASSETS
Current
Cash and cash equivalents (Note 4)		5,197				9,225
Short-term investments (Note 5)		2,246				11,723
Marketable securities (Note 6)		15,382				2,024
Other receivables and prepaid expenses		52				96
Total Current Assets		22,877				23,068
Other long-term assets (Note 8)		525				525
Restricted cash (Note 9)		214				214
Resource interests (Note 10)		5,053				5,053
Plant and equipment (Note 12)		483				661
Total Assets		29,152				29,521
LIABILITIES
Current
Accounts payable		189				314
Accrued liabilities		212				197
Total Current Liabilities		401				511
Asset retirement obligation (Note 13)		1,238				1,162
Total Liabilities		1,639				1,673
Commitments (Notes 10 and 21)
SHAREHOLDERS' EQUITY
Share capital (Note 14)		65,583				65,621
Contributed surplus (Note 15)		8,668				8,354
Accumulated other comprehensive income		-				-
Deficit		(46,738	)			(46,127	)
Total Shareholders’ Equity		27,513				27,848
Total Liabilities and Shareholders’ Equity		29,152				29,521
Subsequent events (Note 22)

Approved by the Board of Directors:

“John F. Kearney”	“Brian A. Atkins, CA”
Director	Director

See accompanying notes to the financial statements.                                                                                                                                     & #160;   

4

CANADIAN ZINC CORPORATION

(a development stage company)

Statements of Operations, Comprehensive Loss and Deficit

(Prepared in accordance with Canadian generally accepted accounting principles)

(in thousands of Canadian dollars except share and per share amounts)	Year ended December 31,
	$	2009		$	2008		$	2007
Income Investment Income		242			899			1,234
Mineral exploration and development costs (Note 11)		2,260			3,426			11,050
Expenses
Depreciation		23			21			13
Listing and regulatory fees		69			48			59
Management and directors fees		623			566			347
Office and general		359			360			463
Professional fees		380			220			396
Project evaluation		120			21			39
Shareholder and investor communications		177			230			420
Stock based compensation		288			205			267
		2,039			1,671			2,004
Other income (expenses)
Foreign exchange (loss) gain		(260	)		8			-
American Eagle Option (Note 7)		(2,396	)		-			-
Gain (loss) on marketable securities (Note 6)		6,102			(38	)		(150	)
		3,446			(30	)		(150	)
Loss before income taxes		(611	)		(4,228	)		(11,970	)
Future income taxes income (Note 18)		-			-			2,487
Net loss for the year		(611	)		(4,228	)		(9,483	)
Other comprehensive income/(loss)		-			-			-
Comprehensive loss		(611	)		(4,228	)		(9,483	)
Deficit, beginning of year		(46,127	)		(41,899	)		(32,416	)
Net loss		(611	)		(4,228	)		(9,483	)
Deficit, end of year		(46,738	)		(46,127	)		(41,899	)
Loss per share - basic and diluted		(0.005	)		(0.04	)		(0.08	)
Weighted average number of common  shares outstanding – basic and diluted		118,915,812			120,440,062			113,429,078

See accompanying notes to the financial statements. 

5

CANADIAN ZINC CORPORATION

(a development stage company)

Statements of Cash Flows

(Prepared in accordance with Canadian generally accepted accounting principles)

(in thousands of Canadian dollars)	Year ended December 31,
	$	2009		$	2008		$	2007
Operating Activities
Net loss for the year		(611	)		(4,228	)		(9,483	)
Reclamation expenditures		(93	)		(286	)		(246	)
Adjustment for items not involving cash:
- Accretion and depreciation		276			281			233
- Future income taxes		-			-			(2,487	)
- (Gain) loss on marketable securities (Note 6)		(6,102	)		38			150
- Unrealized foreign exchange		64			-			-
- American Eagle Option		1,811			-			-
- Stock based compensation		288			205			267
Change in non-cash working capital items:
- other receivables and prepaid expenses		44			76			98
- accounts payable and accrued liabilities		(17	)		(836	)		790
		(4,340	)		(4,750	)		(10,678	)
Financing Activities
Capital stock issued and subscribed, net of issuance costs		-			340			10,184
Capital stock repurchased (Note 14)		(12	)		(378	)		-
		(12	)		(38	)		10,184
Investing Activities
Short-term investments		9,477			9,772			(6,016	)
Marketable securities sold		6,100			-			-
Marketable securities purchased		(13,356	)		(1,962	)		-
American Eagle Option		(1,811	)		-			-
Restricted cash		-			(214	)		-
Other long-term assets		-			(100	)		(30	)
Plant and equipment		(22	)		(402	)		(149	)
		388			7,094			(6,195	)
Impact of exchange rate changes on cash and cash equivalents		(64	)		-			-
(Decrease) increase in cash and cash equivalents		(4,028	)		2,306			(6,689	)
Cash and cash equivalents, beginning of year		9,225			6,919			13,608
Cash and cash equivalents, end of year		5,197			9,225			6,919
Supplemental Information:
Interest paid		-			-			-
Income taxes paid		-			-			-

See accompanying notes to the financial statements.

6

CANADIAN ZINC CORPORATION

(a development stage company)

Statements of Shareholders’ Equity

(Prepared in accordance with Canadian generally accepted accounting principles)

	Common shares					Contributed
(in thousands of Canadian dollars except for share amounts)	Shares		Amount			Surplus			Deficit			Total
Balance, December 31, 2006	107,590,212		$	59,365		$	6,479		$	(32,416	)	$	33,428
Exercise of options at $0.23 per share	450,000			131			(27	)		-			104
Future income tax effect of flow-through shares	-			(2,487	)		-			-			(2,487	)
Exercise of options at $0.89 per share	100,000			153			(64	)		-			89
Exercise of warrants between $0.72 - $0.93 per share	302,738			394			(174	)		-			220
Issue of shares at $0.85 per unit	11,765,000			9,766			-			-			9,766
Share purchase warrants	-			(1,366	)		1,366			-			-
Exercise of warrants at $0.72 per share	6,012			8			(3	)		-			5
Stock-based compensation	-			-			267			-			267
Net loss for the year	-			-			-			(9,483	)		(9,483	)
Balance, December 31, 2007	120,213,962		$	65,964		$	7,844		$	(41,899	)	$	31,909
Exercise of warrants at $0.72 per share	471,101			613			(273	)		-			340
Shares cancelled under normal course issuer bid	(1,716,000	)		(956	)		578			-			(378	)
Stock-based compensation	-			-			205			-			205
Net loss for the year	-			-			-			(4,228	)		(4,228	)
Balance, December 31, 2008	118,969,063		$	65,621		$	8,354		$	(46,127	)	$	27,848
Shares cancelled under normal course issuer bid	(68,500	)		(38	)		26			-			(12	)
Stock-based compensation	-			-			288			-			288
Net loss for the year	-			-			-			(611	)		(611	)
Balance, December 31, 2009	118,900,563		$	65,583		$	8,668		$	(46,738	)	$	27,513

See accompanying notes to the financial statements.

7

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

1.           Nature of Operations

The Company is primarily engaged in the exploration, development and re-permitting of its Prairie Creek property.  The Company is considered to be in the exploration and development stage given that its Prairie Creek property is not yet in production and, to date, has not earned any significant revenues.  The recoverability of amounts shown for resource interests is dependent on the existence of economically recoverable reserves, obtaining the necessary permits to operate a mine, obtaining the financing to complete development and future profitable production (see Note 10).

During the year ended December 31, 2009, the Company diversified its interests through the acquisition of shares in Vatukoula Gold Mines Plc (“VGM”) which operates the Vatukoula Gold Mine in Fiji (see Note 6).

These financial statements have been prepared on the basis of accounting principles applicable to a going concern which assumes that the Company will realize its assets and discharge its liabilities in the normal course of business.  Management has carried out an assessment of the going concern assumption and has concluded that the Company has sufficient cash and cash equivalents, short-term investments and marketable securities (as well as no debt obligations outside of normal course accounts payable and accrued liabilities) to continue operating at current levels for the ensuing twelve months.  Accordingly, these financial statements do not reflect the adjustments to the carrying value of assets and liabilities, or the impact on the statement of operations and balance sheet classifications that would be necessary were the going concern assumption not appropriate.

However, at such time that the Company receives its operating permits for the Prairie Creek Mine (which is not a certain event), it will require significant additional financing to place the mine into operation.  There is no guarantee that the Company will be able to obtain such financing to complete the development of the Prairie Creek Mine.

2. Significant Accounting Policies

These financial statements have been prepared in accordance with Canadian GAAP.  These accounting principles conform in all material respects to U.S. GAAP, except as disclosed in Note 20.

(a) Measurement Uncertainty

The preparation of financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Significant accounts that require estimates as the basis for determining the stated amounts include resource interests, plant and equipment, asset retirement obligation, future income taxes and stock-based compensation.

Depreciation and depletion of resource interests and plant and equipment assets are dependent upon estimates of useful lives and resource estimates, both of which are determined with the exercise of judgment.  The assessment of any impairment of resource interests or plant and equipment is dependent upon estimates of fair value that take into account factors such as resources, economic and market conditions and the useful lives of assets.  Asset retirement obligations are recognized in the period in which they arise and are stated at the fair value of estimated future costs.  These estimates require extensive judgment about the nature, cost and timing of the work to be completed, and may change with future changes to costs, environmental laws and regulations and remediation practices.  Stock-bas ed compensation expense is calculated using the Black-Scholes valuation model which requires significant judgment as to considerations such as stock option lives and stock volatility.

8

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

2. Significant Accounting Policies (continued)

(b) Financial Instruments

Financial assets and liabilities are recognized on the balance sheet when the Company becomes a party to the contractual provisions of the instrument.  Fair values are determined directly by reference to published price quotations in an active market.  The Company’s accounting policy for each category of financial instrument is summarized below:

Loans and receivables

Loans and receivables are initially recognized at fair value including direct and incremental transaction costs and are subsequently measured at amortized cost, using the effective interest method.  The Company has classified its other receivables as loans and receivables.

Held for trading

Financial assets and liabilities that are purchased and incurred with the intention of generating income in the near term are classified as held for trading.  Financial instruments included in this category are initially recognized at fair value and transaction costs are taken directly to net income (loss) along with gains and losses arising from changes in fair value.  Regular-way purchases and sales of financial assets are accounted for on the trade date.

The Company has designated its cash and cash equivalents, short-term investments, marketable securities and restricted cash as held for trading.

Held-to-maturity

Held-to-maturity investments are financial assets with fixed or determinable payments that the Company has the intention and ability to hold to maturity.  These are initially recognized at fair value including direct and incremental transaction costs and are subsequently valued at amortized cost using the effective interest rate method.  The Company has no financial assets classified as held-to-maturity.

Available-for-sale

Available-for-sale assets are financial assets that are designated as available-for-sale and are not categorized into any other categories as described above.  These assets are initially recognized at fair value including direct and incremental transaction costs and are subsequently held at fair value with gains and losses arising from changes in fair value included in other comprehensive income until ultimate sale when the cumulative gain or loss is transferred to net income.  The Company had no financial assets designated as available-for-sale.

Other liabilities

If not classified as held for trading, financial liabilities are classified as other liabilities.  After initial measurement at fair value, other liabilities are measured at amortized cost using the effective interest rate method.  Gains or losses are recognized in net income (loss) in the period when the liability is derecognized.  The Company has classified its accounts payable and accrued liabilities as other liabilities.

(c) Cash and Cash Equivalents

Cash and cash equivalents consist of cash and liquid investments which are readily convertible into cash with maturities of three months or less when purchased.

(d) Short-term Investments

Short-term investments, which consist primarily of investments in Bankers Acceptances and Guaranteed Investment Contracts (“GIC’s”) are investments with maturities of more than three months and less than one year when purchased.

9

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

2. Significant Accounting Policies (continued)

(e) Marketable Securities

Marketable securities are recorded at their fair market value on the date of acquisition and are classified as held for trading.  The carrying value of the securities is adjusted at each subsequent balance sheet date to the then fair value (based upon the market price and the Bank of Canada quoted exchange rate if applicable) with the resulting unrealized gains or losses included in earnings for the period.  Transaction costs relating to the purchase of marketable securities are expensed directly to net income (loss).

(f) Foreign Currency Transactions

Foreign currency transactions are translated at the rate in effect when the transactions occur.  Monetary assets and liabilities denominated in a foreign currency (if any) are translated at the rate in effect at the balance sheet date.

(g) Plant and Equipment

Plant and equipment is recorded at cost, net of accumulated depreciation.  Depreciation is provided on a declining-balance basis at the following annual rates:

Mining equipment and pilot plant	30%
Furniture, fixtures and equipment	20%

Depreciation is provided at half the annual rate in the year of acquisition.

Leasehold improvements are recorded at cost, net of accumulated amortization.  Amortization on leasehold improvements is provided on a straight-line basis over the life of the lease.

(h) Resource Interests

Resource interests include acquired mineral use rights for mineral property held by the Company. The amount of consideration paid (in cash or share value) for resource interests is capitalized, along with the cost of any site infrastructure (such as the plant and mill) acquired.  The amounts shown for resource interests represent costs of acquisition incurred to date, less recoveries, and do not necessarily reflect present or future values.  These costs will be amortized against revenue from future production or written off if the resource interest is abandoned or sold.  The cost of resource interests also includes the cost of estimated asset retirement obligations (less accumulated amortization)

Depletion of costs capitalized on projects put into commercial production will be recorded using the unit-of-production method based upon estimated proven and probable reserves.

The carrying values of resource interests are reviewed by management at least annually to determine if they have become impaired.  If impairment is determined to exist, the resource interest will be written down to its net recoverable value.

Ownership in resource interests involves certain inherent risks, including geological, metal prices, operating costs, and permitting risks.  Many of these risks are outside the Company’s control.

The ultimate recoverability of the amounts capitalized for the resource interests is dependent upon the delineation of economically recoverable ore reserves, obtaining the necessary financing to complete their development, obtaining the necessary permits to operate a mine, and realizing profitable production or proceeds from the disposition thereof.  Management’s estimates of recoverability of the Company’s investment in its Prairie Creek resource interests have been based on current and expected conditions.  However, it is possible that changes could occur which could adversely affect management’s estimates and may result in future write downs of resource interest carrying values.

10

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

2. Significant Accounting Policies (continued)

(i) Exploration and Development Costs

Mineral exploration and development costs are expensed as incurred until such time as either mineral reserves are proven or permits to operate the mineral resource property are received and financing to complete development has been obtained.  Following confirmation of mineral reserves or receipt of permits to commence mining operations and obtaining necessary financing, development expenditures are capitalized as deferred development expenditures included within resource interests.

(j) Property Option Agreements

Property Option payments are recorded as resource interest costs or recoveries when the payments are made or received, respectively.

(k) Asset Retirement Obligations

Future obligations to retire an asset, including dismantling, remediation and ongoing treatment and monitoring of the site, are recognized and recorded as a liability at fair value at the time at which they are incurred or the event occurs giving rise to such an obligation.  The liability is increased (accreted) over time through periodic charges to net income (loss).  The corresponding asset retirement cost is capitalized as part of the asset’s carrying value, and is amortized over the asset’s estimated useful life.  The amount of the liability will be subject to reassessment at each reporting period.

The Company, where possible, has estimated asset retirement obligations based on current best practice.  These estimates, made by management of the Company, are subject to change as a result of changes in regulations, the extent of environmental remediation required, the means of reclamation, or cost estimates.  Changes in estimates are accounted for prospectively during the period the estimate is revised.

(l) Long-lived Asset Impairment

Long-lived assets are tested for impairment whenever events or changes in circumstances indicate the related carrying amounts may not be recoverable.  Impairment is considered to exist if total estimated future cash flows or probability-weighted cash flows on an undiscounted basis are less than the carrying amount of the assets, including resource interests and plant and equipment.  An impairment loss, if any, is generally measured and recorded based on a discounted estimated future cash flows analysis.

(m) Earnings (Loss) Per Common Share

Earnings (loss) per share calculations are based on the net income (loss) attributable to common shareholders for the period divided by the weighted average number of common shares issued and outstanding during the year.

Diluted earnings (loss) per share is calculated based on the weighted average number of common shares outstanding during the year, plus the effects of dilutive common share equivalents.  This method requires that the dilutive effect of outstanding options and warrants issued should be calculated using the treasury stock method.  This method assumes that all common share equivalents have been exercised at the beginning of the period (or at the time of issuance, if later), and that the funds obtained thereby were used to purchase common shares of the Company at the average trading price of common shares during the period.

As the Company incurred net losses in fiscal 2009, 2008 and 2007, the stock options and share purchase warrants as disclosed in Note 15 were not included in the computation of loss per share as such inclusion would be anti-dilutive.

11

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

2. Significant Accounting Policies (continued)

(n) Income Taxes

The Company follows the asset and liability method of accounting for income taxes.  Future income tax assets and liabilities are recognized in the period for temporary differences between the tax and accounting bases of assets and liabilities as well as for the potential benefit of income tax losses and other deductions carried forward to future years.

Future income tax assets and liabilities are measured using substantively enacted tax rates and laws expected to apply in the years in which temporary differences are expected to be recovered or settled.  The effect of a change in tax rates on future income tax assets and liabilities is recognized in operations in the period that includes the substantive enactment date.  The value of future income tax assets is reviewed annually and adjusted, if necessary, by use of a valuation allowance to reflect the estimated realizable amount.

(o) Flow-through Shares

Canadian tax legislation permits a company to issue flow-through shares whereby the tax benefits arising from qualified resource expenditures can be renounced by the company and are claimed by the investors in such shares.  To recognize the foregone tax benefits to the Company, on the date that the renouncement is filed with the tax authorities, the carrying values of the shares issued is reduced by the tax effect of the tax benefits renounced.  In accordance with EIC-146, “Flow-through shares,” the Company records the future income tax assets that result from the renouncement of tax benefits as a recovery of future income tax expense.

(p) Stock-based Compensation

The Company follows the fair value method of accounting for the stock option awards granted to employees and directors.  The fair value of stock options is determined by the widely used Black-Scholes Option Pricing Model with assumptions for risk-free interest rates, dividend yields, volatility of the expected market price of the Company’s common shares and an expected life of the options.  The fair value of direct awards of stock is determined by the quoted market price of the Company’s stock.  Stock-based compensation is amortized to earnings over the vesting period of the related option.

Option-pricing models require the use of highly subjective estimates and assumptions including the expected stock price volatility.  Changes in the underlying assumptions can materially affect the fair value estimates and, therefore, existing models do not necessarily provide reliable measurement of the fair value of the Company’s stock options.

(q) Revenue Recognition

Investment income on cash and cash equivalents and short-term investments is recognized as it is earned.

12

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

[

3.           Accounting Changes

(a) Section 3064, “Goodwill and Intangible Assets”

On January 1, 2009, the Company adopted the recommendations included in Section 3064, “Goodwill and Intangible Assets,” of the CICA Handbook.  This Section replaces Section 3062, “Goodwill and Other Intangible Assets” and establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets.  The adoption of this Section has had no material impact on the Company’s financial statements.

(b) Section 3862, “Financial Instruments – Disclosure”

In June 2009, the CICA Accounting Standards Board (“AcSB”) issued an amendment to CICA Handbook Section 3862 in an effort to mirror changes made to International Financial Reporting Standards in IFRS 7 in 2009 and based on requirements for recurring fair value measurements under U.S. GAAP in ASC 820-10 (FAS 157).  The effective date of the amendment is for financial years ending after September 30, 2009.  The purpose was to establish a framework for measuring fair value and expand disclosures about fair value measurements.  To make the disclosures, companies shall classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.  The fair value hierarchy has th e following levels:

(i) Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

(ii) Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

(iii) Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Additional disclosures related to financial instruments as a result of the amended Section 3862 are included in Note 19.

(c) EIC-173, “Credit Risk and the Fair Value of Financial Assets and Financial Liabilities”

In January 2009, the CICA issued EIC-173, “Credit Risk and the Fair Value of Financial Assets and Financial Liabilities,” which provides guidance on how to account for the credit risk of an entity and counterparty when determining fair value of financial assets and financial liabilities.  The Company immediately adopted EIC-173 with no impact on its financial statements.

(d) EIC-174, “Mining Exploration Costs”

In March 2009, the CICA issued EIC-174, “Mining Exploration Costs,” which provides guidance on the accounting and the impairment review of capitalized exploration costs.  The Company, which currently expenses its exploration costs, immediately adopted EIC-174 with no impact on its financial statements.

13

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

3.           Accounting Changes (continued)

(e) New Canadian Accounting Standards

In February 2008, the AcSB confirmed that the use of International Financial Reporting Standards (“IFRS”) will be required in 2011 for public companies in Canada (i.e., IFRS will replace Canadian GAAP for public companies).  The official changeover date will apply for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011.  The Company is currently continuing to assess and work through its IFRS changeover plan.

In January 2009, the AcSB issued Sections 1582, “Business Combinations,” 1601, “Consolidations” and 1602, “Non-controlling Interests” to replace Section 1581, “Business Combinations” and Section 1600, “Consolidated Financial Statements.”  Section 1582 will apply to a transaction in which the acquirer obtains control of one or more businesses (as defined in the Section).  Most assets acquired and liabilities assumed, including contingent liabilities that are considered to be improbable, will be measured at fair value.  A bargain purchase will result in the recognition of a gain.  Acquisition costs will be expensed.  Any non-controlling interest will be recognized as a separate component of shareholders’ equity and net inc ome will be allocated between the controlling and non-controlling interests.  These new standards apply to fiscal years beginning on or after January 1, 2011 with early adoption permitted from the beginning of a fiscal year.  The Company expects to adopt the new standards effective January 1, 2010 and does not anticipate any material impact to its financial statements unless a business combination is entered into after the adoption date.

4.           Cash and Cash Equivalents

Cash and cash equivalents consist of cash and liquid investments which are readily convertible into cash with maturities of three months or less when purchased.  The Company’s cash and cash equivalents at December 31, 2009 consisted of cash of $5.174 million and cash equivalents of $23,000 (2008 – cash of $264,000 and cash equivalents of $8.961 million).

5.           Short-term Investments

Short-term investments, which consist primarily of investments in Bankers Acceptances and Guaranteed Investment Certificates, are investments with maturities of more than three months and less than one year when purchased.  At December 31, 2009, short-term investments were valued at $2.246 million, earning investment income at a rate of 0.5% (2008 - $11.723 million, earning income at rates ranging from 1.48% to 4.20%).  The Company has designated its short-term investments as held for trading assets.  Investment income and changes in market value on short-term investments are recorded in investment income in the Statement of Operations.  The market value of these assets is based upon quoted market values and the recorded amounts at December 31, 2009 equal the fair value for these investments.

14

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

6.           Marketable Securities

The Company holds a portfolio of marketable securities which have been designated as held for trading assets.  Changes in fair value, based on quoted market values and exchange rates, of the marketable securities are recorded in the Statement of Operations.  The timing and proceeds from the eventual sale of these shares are dependent, to a large extent, on market forces that are not within the control of the Company.  Therefore, there is a significant amount of uncertainty as to the actual amount of cash the Company would eventually receive upon the sale of these shares.

	December 31, 2009			December 31, 2008
Held for Trading	# of Shares	Original Cost $	Fair Value $	# of Shares	Original Cost $	Fair Value $
Vatukoula Gold Mines Plc	628,669,022	10,142	14,039	-	-	-
Zazu Metals Corporation	3,400,000	646	1,003	-	-	-
Rio Tinto plc	1,500	213	340	3,500	497	379
Alcoa Inc.	-	-	-	16,800	210	230
Anglo American plc	-	-	-	23,000	286	325
BHP Billiton Ltd.	-	-	-	8,000	328	418
Companhia Vale do Rio Doce	-	-	-	15,000	205	221
Copper Mesa Mining Corp.	-	-	-	764,595	250	23
Freeport-McMoRan Copper & Gold Inc.	-	-	-	12,000	337	358
Teck Cominco Limited	-	-	-	11,600	99	70
		11,001	15,382		2,212	2,024

During the year the Company acquired shares in Vatukoula Gold Mines Plc (“VGM”), a UK company listed on AIM (part of the London Stock Exchange), which owns and operates the Vatukoula Gold Mine located in Fiji.  The Company acquired the shares of VGM in various tranches as described below:

i.     On April 9, 2009, the Company acquired 347,669,022 shares of VGM at a price of £0.0073 per share for total consideration of £2.538 million ($4.554 million).

ii.     On May 7, 2009, the Company entered into a subscription agreement with VGM to acquire a further 200,000,000 shares of VGM (the “Subscription Shares”) for an investment of £1.2 million (£0.006 per share), or $2.169 million (the “Subscription”).  Completion of the Subscription occurred on June 10, 2009.  The Subscription Shares are subject to an agreement with VGM whereby the Company cannot dispose of the Subscription Shares prior to March 10, 2010 without the prior consent of the Board of VGM, except in certain defined circumstances, which include disposal pursuant to a Court Order and acceptance of an offer made to all shareholders of VGM to acquire all its issued shares.

iii.     On September 24, 2009, the Company entered into a subscription agreement with VGM to acquire 125,000,000 shares for an investment of £1.5 million (£0.012 per share) or $2.553 million.  Completion of the subscription occurred on October 21, 2009.

iv.     On September 28, 2009, the Company completed the sale of 200,000,000 VGM shares, pursuant to a previously agreed option agreement, to Viso Gero Global Inc. (“Viso Gero”) for proceeds of £2 million ($3.456 million).  On September 28, 2009, the Company exercised an option held with VGM, using the proceeds received from Viso Gero, to subscribe for 156,000,000 shares of VGM for a total of £2 million (£0.0128 per share) or $3.431 million.

On December 23, 2009, the Company acquired 3,400,000 shares of Zazu Metals Corporation (“Zazu”) at $0.19 per share or $646,000.  Zazu is listed on the TSX and its principal asset is the Lik zinc-lead-silver deposit in northwest Alaska, 22 kilometres from Teck’s Red Dog Mine.

15

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

7. American Eagle Option / Warrants

In April 2009, the Company entered into an Option Agreement on the Tuvatu Gold Project (“Tuvatu”) in Fiji.  Tuvatu is owned by American Eagle Resources Inc. (“American Eagle”).  Under the Option Agreement, the Company had the option, until October 30, 2009, to carry out further evaluation and exploration of Tuvatu.  The Company made an option payment of $1.811 million to the majority shareholder of American Eagle, which obligated the majority shareholder of American Eagle, upon exercise of the option by the Company, to support an amalgamation of American Eagle with a wholly-owned subsidiary of Canadian Zinc under which 16,250,000 shares of Canadian Zinc were to be issued to the shareholders of American Eagle in exchange for the issued shares of American Eagle.  During the option period, Canadian Zinc agreed to maintain the Tuvatu property in good standing, incurring expenditures of $585,000.

In September 2009, the Company agreed to early cancellation of the Option Agreement and received non-transferable warrants to purchase up to 1,250,000 common shares of American Eagle.  Each warrant is exercisable into one common share of American Eagle at the lesser of $2 or 25% above the price per share of the initial public offering of American Eagle.  The warrants are exercisable until October 31, 2010.

At December 31, 2009, the Company evaluated the carrying value of the warrants and determined that it was appropriate to record a full write down in value of $1.811 million which has been recorded in the Statement of Operations.

8.           Other Long-term Assets

Other long-term assets of $525,000 (2008 - $525,000) consist of reclamation security deposits that the Company has lodged with government agencies as security in support of certain reclamation obligations.

9.           Restricted Cash

The Company has $214,000 (2008 - $214,000) of cash on hand, which is restricted as security for a letter of guarantee issued by a financial institution, to secure performance by the Company of certain obligations pursuant to an authorization to carry out road repairs adjacent to the Prairie Creek Mine Property granted by the Department of Fisheries and Oceans Canada (“DFO”) (see Notes 10 and 21).

16

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

10.         Resource Interests

The Company’s resource interests comprise the Prairie Creek Mine Property (“Prairie Creek”).

	December 31, 2009		December 31, 2008
Acquisition costs:
- Prairie Creek mining lands	$	3,158	$	3,158
- Prairie Creek plant and mill		500		500
		3,658		3,658
Asset retirement obligation		1,395		1,395
	$	5,053	$	5,053

The asset retirement obligation balance (which relates entirely to Prairie Creek) included within resource interests represents the “asset” portion of amounts initially recorded to correspond with the asset retirement obligation liability (see Note 13).  This asset amount is amortized over the useful life of the asset to which it relates.  To date, no amortization has been recorded on the asset retirement obligation asset.

Prairie Creek Mine

The Company holds a 100% interest in the Prairie Creek Mine property located in the Northwest Territories, Canada.  The Company holds various licences and permits required in order to maintain and perform current activities at the Prairie Creek Mine site.  A summary of permits and licences granted to the Company subsequent to December 31, 2007 is noted below.

On March 20, 2008, the Mackenzie Valley Land and Water Board issued a Type B Water Licence (MV2007L8-0026) to permit remediation of a portion of the winter road.  The Water Licence is valid for five years to March 20, 2013.

In June 2008, the Company entered into a letter of guarantee in the amount of $214,000 in favour of DFO to secure performance by the Company of certain obligations pursuant to an authorization from DFO dated July 15, 2008, to perform certain road repairs in proximity to the Prairie Creek Mine site.

In September 2008, the Water Board granted a two year extension to the Company’s Land Use Permit (MV2001C0023) to September 9, 2010 and a five year renewal of the Company’s Water Licence (MV2001L2-0003) to September 9, 2013.

In June 2008, the Company submitted applications for land use and water permits for the operation of the Prairie Creek Mine.  These permit applications are currently undergoing environmental assessment by the Mackenzie Valley Environmental Impact Review Board.

17

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

11.         Mineral Exploration and Development Costs

The Company’s mineral exploration and development costs incurred on the Prairie Creek property in 2009, 2008 and 2007 are detailed below:

	2009		2008			2007
Assaying and metallurgical studies	$	46	$	154		$	307
Camp operation and project development		763		2,464			2,804
Drilling and underground exploration		-		170			6,076
Insurance, lease rental		65		80			102
Permitting and environmental		1,052		862			694
Transportation and travel		82		390			847
		2,008		4,120			10,830
Drilling and underground development cost recovery		-		(942	)		-
Depreciation – mining plant and equipment		176		168			143
Asset retirement accretion		76		80			77
		252		248			220
Total mineral exploration and development costs for the year		2,260		3,426			11,050
Mineral exploration and development costs, beginning of year		35,993		32,567			21,517
Mineral exploration and development costs, end of year	$	38,253	$	35,993		$	32,567

18

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

12.         Plant and Equipment

	December 31, 2009			December 31, 2008
	Cost $	Accumulated Amortization $	Net Book Value $	Cost $	Accumulated Amortization $	Net Book Value $
Mining equipment	1,084	680	404	1,073	510	563
Pilot plant	108	95	13	108	90	18
Furniture, fixtures & equipment	138	102	36	129	90	39
Leasehold improvements	60	30	30	60	19	41
	1,390	907	483	1,370	709	661

13.         Asset Retirement Obligation

Although the ultimate amount of the asset retirement obligation is uncertain, the fair value estimate of these obligations, including the Company’s obligations to undertake site reclamation and remediation in connection with its Prairie Creek Mine Site infrastructure and development and applicable regulations, is based on information currently available.

The total undiscounted amount of the estimated cash flows required to settle the Company’s reclamation and remediation obligations, as at December 31, 2009, is estimated to be $2.383 million (2008 - $2.383 million).  While it is anticipated that some expenditures will be incurred during the life of the operation to which they relate (should mining activity commence), a significant component of this expenditure will only be incurred at the end of the mine life.

The fair value of the estimated cash flows has been estimated at $1.238 million as at December 31, 2009 (2008 - $1.162 million).  In determining the fair value of the asset retirement obligation, the Company has assumed a long-term inflation rate of 2% (2008 – 2%), a credit-adjusted risk-free discount rate of 6.5% (2008 – 6.5%) and a weighted average useful life of production facilities and equipment of at least ten years.  Elements of uncertainty in estimating this amount include changes in the projected mine life, reclamation expenditures incurred during ongoing operations and reclamation and remediation requirements and alternatives.

A summary of the Company’s provision for asset retirement obligation and reclamation is presented below:

	2009		2008
Balance – beginning of year	$	1,162	$	1,228
Reclamation activity		-		(366	)
Accretion		76		80
Change in estimates		-		220
Balance – end of year	$	1,238	$	1,162

19

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

14. Share Capital

Authorized: Unlimited common shares with no par value (2008 – unlimited).

Issued and outstanding: 118,900,563 common shares (2008 – 118,969,063).

(a) During the year ended December 31, 2009, 68,500 common shares were purchased for cancellation pursuant to the Company’s Normal Course Issuer Bid for a total expenditure of $12,000 or approximately $0.18 per share.  The difference of $26,000 between the cost of the shares re-acquired and the average stated value of the shares based upon the Company’s share capital account was allocated to the contributed surplus account.

Effective June 1, 2009, the Company renewed its normal course issuer bid (the “Bid”) pursuant to which the Company may purchase up to a maximum of 5,000,000 common shares in the capital of the Company. The Bid may be carried out from June 1, 2009 for a period of up to one year. Pursuant to TSX policies, daily purchases made by the Company under the Bid may not exceed 37,481 common shares, subject to certain prescribed exceptions. All common shares purchased pursuant to the Bid will be cancelled and returned to treasury.

(b) During the year ended December 31, 2008:

i. 471,101 warrants were exercised at a price of $0.72 per common share for proceeds of $340,000.

ii. 1,716,000 common shares were purchased for cancellation pursuant to the Company’s Normal Course Issuer Bid for a total expenditure of $378,000 or $0.22 per share.  The difference of $578,000 between the cost of the shares re-acquired and the average stated value of the shares based upon the Company’s share capital account was allocated to contributed surplus.

(c) During the year ended December 31, 2007:

i.     450,000 stock options were exercised at $0.23 per common share for proceeds of $103,500.

ii.     100,000 stock options were exercised at $0.89 per common share for proceeds of $89,000.

iii. 308,750 broker warrants were exercised at $0.72 to $0.93 per common share for proceeds of $225,500.

iv. On July 23, 2007 the Company completed a private placement of 11,765,000 Units at a price of $0.85 per Unit for total proceeds of $10,000,250.  Each Unit consists of one common share and one-half of one common share purchase warrant.  Each whole Warrant entitles the holder to purchase one common share at a price of $1.20 per Warrant Share, until July 23, 2009.  A value of $1,365,667 was assigned to the warrants issued and added to contributed surplus.  The fair value of the warrants was calculated at $0.23 each (see Note 15(b)).  Share issue costs relating to the transaction amounted to $233,918.

20

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

15.         Stock Options and Warrants

   (a)           Stock Options

The Company has an incentive stock option plan in place under which it is authorized to grant stock options to directors, executive officers, employees and consultants.  At December 31, 2009, the Company was allowed to grant up to 10% of the issued share capital of the Company as stock options.  Stock options are exercisable once they have vested under the terms of the grant.  A summary of the Company’s options at December 31, 2009, 2008 and 2007 and the changes for the years then ended is presented below:

	2009				2008				2007
		Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
Outstanding, beginning of year		4,205,000	$	0.73		4,865,000	$	0.73		4,780,000	$	0.66
Granted		2,905,000		0.23		-		-		695,000		0.94
Exercised		-		-		-		-		(550,000)		0.35
Forfeited / expired		(460,000)		0.86		(660,000)		0.72		(60,000)		0.89
Outstanding, end of year		6,650,000	$	0.50		4,205,000	$	0.73		4,865,000	$	0.73

As at December 31, 2009, the Company has outstanding and exercisable stock options, with a weighted average remaining contractual life of 2.28 years, to purchase an aggregate 6,650,000 common shares as follows:

Options Outstanding and Exercisable
Number		Weighted Average Exercise Price	Expiry Date
2,460,000	$	0.60	January 14, 2010
70,000		0.89	June 27, 2011
800,000		0.90	December 13, 2011
455,000		0.94	October 15, 2012
2,865,000		0.23	March 27, 2014
6,650,000	$	0.50

2,905,000 stock options were granted during the year ended December 31, 2009, with a weighted average grant date fair value of $0.10 per stock option.  For the year ended December 31, 2009, using the fair value method for stock-based compensation, the Company recorded a charge of $288,000 for vested stock options granted to directors, officers, employees and service providers.

21

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

15.         Stock Options and Warrants (continued)

(a)           Stock Options (continued)

No stock options were granted during the year ended December 31, 2008.  For the year ended December 31, 2008, using the fair value method for stock-based compensation, the Company recorded a charge of $205,000 (2007 – $267,000) upon the vesting of stock options granted to directors, officers, employees and contractors in the year ended December 31, 2007.

The stock option charges in 2009, 2008 and 2007 were determined using the Black-Scholes option pricing model, based on the following terms and assumptions:

Year of Grant	2009	2008	2007
Dividend Yield	0%	N/a	0%
Risk free interest rate	1.90%	N/a	4.07%
Expected life	4 years	N/a	5 years
Expected volatility	83%	N/a	89%
Weighted average grant date fair value	$0.10	N/a	$0.68

(b)           Warrants

A summary of the Company’s warrants issued and outstanding as at December 31, 2009, 2008 and 2007 and the changes for the years then ended is presented below:

	2009				2008				2007
		Number of Warrants		Weighted Average Exercise Price		Number of Warrants		Weighted Average Exercise Price		Number of Warrants		Weighted Average Exercise Price
Outstanding, beginning of year		5,882,500	$	1.20		17,569,243	$	1.02		11,995,493	$	1.02
Granted		-		-		-		-		5,882,500		1.20
Exercised		-		-		(471,101)		0.72		(308,750)		0.73
Expired		(5,882,500)		1.20		(11,215,642)		1.04		-		-
Outstanding, end of year		-	$	-		5,882,500	$	1.20		17,569,243	$	1.09

As at December 31, 2009, the Company has no outstanding warrants to purchase common shares of the Company.

22

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

15.         Stock Options and Warrants (continued)

(b)           Warrants (continued)

No warrants were issued in the years ended December 31, 2009 and 2008.  The fair value of the warrants issued during the year ended December 31, 2007 was determined using the Black-Scholes option pricing model based upon the following terms and assumptions:

	2009	2008	2007
Dividend Yield	N/a	N/a	0%
Risk free interest rate	N/a	N/a	3.96%
Expected life	N/a	N/a	2  years
Expected volatility	N/a	N/a	67%

The fair value of the 2007 warrants was allocated by bifurcating the warrant value and the closing share price from the amount per unit in the private placement offering (see Note 14(c)(iv)).

(c)           Contributed Surplus

A summary of the contributed surplus account is presented below:

	Options $	Warrants $	Unexercised Options and Warrants $	Normal Course Issuer Bid $	Total $
Balance, December 31, 2006	2,004	4,361	114	-	6,479
Stock options issued	267	-	-	-	267
Stock options exercised	(91)	-	-	-	(91)
Stock options cancelled	(38)	-	38	-	-
Warrants issued	-	1,366	-	-	1,366
Warrants exercised	-	(177)	-	-	(177)
Balance, December 31, 2007	2,142	5,550	152	-	7,844
Stock-based compensation	205	-	-	-	205
Stock options cancelled	(311)	-	311	-	-
Warrants expired	-	(1,262)	1,262	-	-
Broker warrants exercised	-	(273)	-	-	(273)
Shares cancelled under normal course issuer bid	-	-	-	578	578
Balance, December 31, 2008	2,036	4,015	1,725	578	8,354
Stock-based compensation	288	-	-	-	288
Stock options forfeited / expired	(286)	-	286	-	-
Warrants expired	-	(4,015)	4,015	-	-
Shares cancelled under normal course issuer bid	-	-	-	26	26
Balance, December 31, 2009	2,038	-	6,026	604	8,668

23

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

16.         Capital Management

The Company manages its cash and cash equivalents, short-term investments, marketable securities, common shares, stock options and share purchase warrants as capital.  As the Company is in the exploration and development stage, its principal source of funds for its operations is from the issuance of common shares.  The issuance of common shares requires approval of the Board of Directors.  It is the Company’s objective to safeguard its ability to continue as a going concern, so that it can continue to explore and develop its Prairie Creek project for the benefit of its stakeholders.  The Company uses stock options primarily to retain and provide future incentives to key employees and members of the management team.  The granting of stock options is primarily determined by the Com pensation Committee of the Board of Directors.

In 2008, the Company reviewed its current investment portfolio and strategy.  During this review, it was noted that the rates of return for Bankers’ Acceptances and Guaranteed Investment Certificates had declined significantly during the latter half of 2008.  The Company determined that it was appropriate to allocate a portion of its investments to equities in order to seek a better return on its capital resources.

In 2009, the Company acquired shares in Vatukoula Gold Mines Plc and Zazu Metals Corporation as part of its strategic investments to increase shareholder value (see Note 6).

17.         Related Party Transactions

The Company incurred rent expense with a corporation with a common director of the Company in the amount of $24,000 (2008 - $19,000; 2007 - $13,000).  These transactions were within the normal course of business and have been recorded at amounts agreed to by the transacting parties. At December 31, 2009, there were no amounts owing to related parties included in accounts payable and accrued liabilities (2008 - $10,000; 2007 - $2,000).

18.         Income Taxes

The Company’s future income tax income for the year ended December 31, 2009, is $Nil (2008 - $Nil; 2007 - $2.487 million).  A reconciliation of the statutory tax rate to the effective rate for the Company is as follows:

		2009		2008		2007
Statutory tax rate		30.70%		31.00%		34.12%
Recovery of income taxes computed at statutory rates	$	187	$	1,311	$	4,084
Permanent differences		256		(64)		(93)
Expired losses		(183)		(192)		(162)
Other		7		(118)		281
Income tax rate changes		75		(403)		(1,612)
Change in valuation allowance		(342)		(534)		(11)
	$	-	$	-	$	2,487

24

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

18.         Income Taxes (continued)

The approximate tax effect of each type of temporary difference that gives rise to the Company’s future income tax assets and liabilities are as follows:

		2009		2008		2007
Future income tax assets
Non-capital loss carry forwards	$	3,392	$	2,964	$	2,136
Plant and equipment		281		139		183
Resource interests		3,681		3,234		3,310
Other		450		584		758
		7,804		6,921		6,387
Valuation allowance		(7,263)		(6,921)		(6,387)
Net future income tax assets		541		-		-
Future income tax liability on marketable securities		(541)		-		-
Future income tax asset (liability) net	$	-	$	-	$	-

At December 31, 2009, the Company has approximately $12.897 million (2008 - $11.399 million) of non-capital losses for tax purposes available to be carried forward at various dates until 2029 and applied against future income for tax purposes and approximately $19.050 million (2008 - $17.491 million) of unused cumulative Canadian exploration and development expenses for tax purposes available to be carried forward indefinitely and applied against future income for tax purposes.  The non-capital losses expire as follows:

Year
2010	$	1,033
2014		926
2015		936
2026		1,046
2027		2,755
2028		3,746
2029		2,455
	$	12,897

Future income tax benefits which may arise as a result of these losses have been recognized in these financial statements to the extent necessary to reduce future income tax liabilities arising on unrealized capital gains on marketable securities.

During the year ended December 31, 2006, the Company renounced to subscribers of 6,956,522 flow-through shares Canadian exploration expenses of $8 million.  The Company applied the accounting treatment in EIC-146 requiring the transaction to be reported in the 2007 fiscal period.  As a result, future income tax income of $2.487 million and a corresponding reduction in shareholders’ equity was recorded in fiscal 2007.

Funds raised through the issuance of flow-through shares are required to be expended on qualified Canadian mineral exploration expenditures, as defined pursuant to Canadian income tax legislation.  The flow-through gross proceeds less the qualified expenditures made to date represent the funds received from flow-through share issuances which have not been spent and which are held by the Company.  As at December 31, 2009 and 2008, all flow-through proceeds have been expended.

25

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

19.         Financial Instruments

(a) Categories of financial assets and financial liabilities

Under Canadian GAAP financial instruments are classified into one of the following five categories: held for trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets and other financial liabilities.  The carrying values of the Company’s financial instruments, which are the same as their fair values, are classified into the following categories:

	Category		December 31, 2009		December 31, 2008
Cash and cash equivalents	Designated held for trading	$	5,197	$	9,225
Short-term investments	Designated held for trading		2,246		11,723
Marketable securities	Designated held for trading		15,382		2,024
Other receivables and prepaid expenses	Loans and receivables		52		96
Restricted cash	Designated held for trading		214		214
Accounts payable and accrued liabilities	Other liabilities	$	(401)	$	(511)

The recorded amounts for cash and cash equivalents, other receivables, accounts payable and accrued liabilities approximate their fair value due to their short-term nature.  The Company has designated its cash and cash equivalents, short-term investments, marketable securities and restricted cash as held for trading assets.

During the year ended December 31, 2009, the Company recorded a gain on its marketable securities (designated as held for trading) of $6.102 million (2008 – loss of $38,000).

Investment income consists of interest earned on cash, cash equivalents and short-term investments of $214,000 (2008 - $898,000) and dividend income from marketable securities of $28,000 (2008 - $1,000).

(b) Fair Value Measurements

The following table summarizes the classification of the Company’s financial instruments within the fair value hierarchy as at December 31, 2009 (see Note 3(b)):

		Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	5,197	$	-	$	-	$	5,197
Short-term investments		2,246		-		-		2,240
Marketable securities		15,382		-		-		15,382
Restricted cash	$	214	$	-	$	-	$	214

(c) Market risk

The Company holds certain marketable securities that will fluctuate in value as a result of trading on global financial markets.  Furthermore, as the Company’s marketable securities are also in mining companies, market values will fluctuate as commodity prices change.  Based upon the Company’s portfolio at December 31, 2009, a 10% increase or decrease in the market price of the securities held, ignoring any foreign currency risk which is described below, would have resulted in an increase (or decrease) to net loss of approximately $1.538 million.

26

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

19.         Financial Instruments (continued)

(d) Interest rate risk

Included in the loss for the year ended December 31, 2009 is investment income on the Company’s cash and cash equivalents and short-term investments.  If interest rates had been 100 basis points (1%) lower (higher) then net loss would have been approximately $148,000 higher (lower).  The Company does not have any debt obligations which expose it to interest rate risk.

(e) Foreign currency risk

The Company holds certain marketable securities and cash from sale of marketable securities that are denominated in U.S. dollars and which, as held for trading assets, impact the Company’s net loss as a result of being marked to market at each reporting period. The Company estimates that, based upon the cash and marketable securities held at December 31, 2009, and assuming no changes in number of shares or stock price, for every $0.01 fluctuation in exchange rate between the Canadian and U.S. dollar, the Company’s net loss would be $8,000 higher (or lower).  The Company also holds marketable securities denominated in U.K. pounds sterling.  Based upon the marketable securities held at December 31, 2009, and assuming no changes in number of shares or stock price, for every $0.01 fluctuation in exchange ra te between the Canadian  dollar and U.K. pound sterling, the Company’s net loss would be $83,000 higher (or lower).

(f) Credit risk

The Company considers that the following financial assets are exposed to credit risk: cash and cash equivalents, short-term investments, marketable securities and restricted cash.  The total value of these items at December 31, 2009 is $23.039 million.  Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.  The Company does not currently generate any revenues from sales to customers nor does it hold derivative type instruments that would require a counterparty to fulfil a contractual obligation resulting in a credit risk.  The Company has never held any asset-backed paper instruments.  The Company seeks to place its cash and cash equivalents, short-term investments and restricted cash w ith reputable financial institutions.  Accordingly, the Company believes that it is exposed to minimal credit risks at the current time, although the current concerns surrounding financial institutions globally have increased the risk of a credit default by a major bank impacting the Company.  At December 31, 2009, the Company’s cash and cash equivalents, short-term investments and restricted cash were invested in five financial institutions.

(g) Liquidity risk

Liquidity risk encompasses the risk that the Company cannot meet its financial obligations as they fall due.  As at December 31, 2009, the Company had positive working capital of $22.476 million.  Accordingly, the Company is able to meet its current obligations and has minimal liquidity risk.  However, the Company will require significant additional funding in the future in order to complete the development of the Prairie Creek Mine site and bring the mine into production.  Accordingly, there is a risk that the Company may not be able to secure adequate funding on reasonable terms, or at all, at that future date.

27

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

20.         Reconciliation of Canadian and United States Generally Accepted Accounting Principles

In June 2009, the United States Financial Accounting Standards Board (“FASB”) issued accounting standards related to its accounting standards codification of the hierarchy of generally accepted accounting principles.  The standard is the sole source of authoritative generally accepted accounting principles of the United States (“U.S. GAAP”) to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The Codification superseded non-SEC accounting and reporting standards.  All accounting literature that is not in the Codification, not issued by the SEC and not otherwise grandfathered is non-auth oritative.

For the purposes of U.S. GAAP the Company is considered to be an Exploration Stage Enterprise.  These financial statements have been prepared in accordance with Canadian GAAP which differs in certain material respects from U.S. GAAP.  The material differences between Canadian and U.S. GAAP, in respect of these financial statements, are summarized as follows:

Balance Sheets

	2009			2008
Share capital (Canadian GAAP)	$	65,583		$	65,621
Increase due to future income tax recovery on renouncement of flow-through shares (b)		4,250			4,250
Decrease due to flow-through share premium paid in excess of market value (b)		(1,531	)		(1,531	)
Share capital (U.S. GAAP)	$	68,302		$	68,340
Deficit (Canadian GAAP)	$	(46,738	)	$	(46,127	)
Increase due to future income tax recovery on renouncement of flow-through shares (b)		(4,250	)		(4,250	)
Decrease due to flow through share premium paid in excess of market value (b)		1,531			1,531
Deficit (U.S. GAAP)	$	(49,457	)	$	(48,846	)

Statements of Operations

	2009			2008			2007
Net loss and comprehensive loss (Canadian GAAP)	$	(611	)	$	(4,228	)	$	(9,483	)
Flow through share premium reversal (b)		-			-			1,531
Future income tax recovery elimination (b)		-			-			(2,487	)
Net loss and comprehensive loss (U.S. GAAP)	$	(611	)	$	(4,228	)	$	(10,439	)
Loss per share  - basic and diluted (U.S. GAAP)	$	(0.005	)	$	(0.04	)	$	(0.09	)
Weighted average number of common shares outstanding - basic and diluted (U.S. GAAP)		118,915,812			120,440,062			113,429,078

28

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

20. Reconciliation of Canadian and United States Generally Accepted Accounting Principles (continued)

(a) Income Taxes

Under Canadian GAAP, future income taxes are calculated based on enacted or substantively enacted tax rates applicable to future years.  Under U.S. GAAP, only enacted rates are used in the calculation of future income taxes.  This difference in GAAP did not result in a difference in the financial position, results of operations or cash flows of the Company for the years presented.

(b)           Flow-through Shares

Under Canadian GAAP, no liabilities are recorded on flow-through shares until expenditures have been renounced.  Under U.S. GAAP, a liability on flow-through shares is required at the time such shares are issued for the excess of the shares over quoted market value.  This liability is reversed and a deferred tax liability is recognized for U.S. GAAP when the expenditures are renounced.  Under U.S. GAAP, unexpended flow-through funds as at the balance sheet date are separately classified as restricted cash.  At December 31, 2009, there were $Nil in unexpended flow-through funds (2008 - $Nil).

(c)           Newly Adopted Accounting Pronouncements

Hierarchy of Generally Accepted Accounting Principles

In June 2009, the FASB issued Accounting Standards Codification (“ASC”) Topic 105, “Generally Accepted Accounting Principles” (“ASC 105”).  ASC 105 makes the FASB Accounting Standards Codification the single source of authoritative U.S. accounting and reporting standards, but it does not change accounting principles generally accepted in the United States of America.  ASC 105 was effective for interim and annual periods ending after September 15, 2009. Adoption of ASC 105 did not have a material impact on the Company’s financial condition, results of operations or cash flows.

Fair Value Accounting

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”), which is now included in ASC 820, “Fair Value Measurements and Disclosures.”  FAS 157 defined fair value, established a framework for measuring fair value in generally accepted accounting principles, and expanded disclosures about fair value measurements.  The provisions of FAS 157 were adopted January 1, 2008.

In February 2008, the FASB staff issued Staff Position No. 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”).  FSP FAS 157-2 delayed the effective date of FAS 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  The provisions of FSP FAS 157-2 were adopted by the Company on January 1, 2009 and did not have a material impact on the Company’s financial position, results of operations or cash flows.

In April 2009, the FASB issued FASB Staff  Position 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" (“FSP 157-4”).  FSP 157-4 provides additional guidance for estimating fair value in

accordance with FAS 157 when the volume and level of activity for the asset or liability have significantly decreased.  FSP 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly.  FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FSP 157-4 did not have a material impact on the Company’s financial position, results of operations or cash flows.

29

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

20. Reconciliation of Canadian and United States Generally Accepted Accounting Principles (continued)

(c)           Newly Adopted Accounting Pronouncements (continued)

Business Combinations

In December 2007, the FASB issued FASB Statement No. 141(R), “Business Combinations” (“FAS 141(R)”), now included in ASC 805, “Business Combinations,” which retains the requirements that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination.  Among the significant changes that FAS 141(R) makes to how the acquisition method is applied include (a) measuring the assets acquired, the liabilities assumed, and any non-controlling interest at their fair values, (b) recognizing assets acquired and liabilities assumed arising from contingencies, (c) recognizing contingent consideration at the acquisition date, measured at its fair value and (d) recognizing a gain in the event of a bargain purchase (instead of ne gative goodwill).  FAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period that commences on or after December 15, 2008.  The Company adopted FAS 141 (R) on January 1, 2009 with no impact on the Company’s financial position, results of operations or cash flows.

Subsequent Events

In May 2009, the FASB issued ASC Topic 855, “Subsequent Events” (“ASC 855”).  ASC 855 establishes principles and requirements for events that occur after the balance sheet date, but before the issuance of the financial statements.  ASC 855 requires disclosure of the date through which subsequent events have been evaluated and disclosure of certain non-recognized subsequent events.  ASC 855 is effective for interim and annual periods ending after June 15, 2009.  Adoption of ASC 855 did not have a material impact on the Company’s financial position, results of operations or cash flows.

(d)           New Accounting Pronouncements

In June 2009, the FASB issued amendments to ASC Subtopic 810-10-15-13, “Variable Interest Entities” (“ASC 810-10-15-13”) to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements.  The amendment to ASC 810-10-15-13 is effective as of the first fiscal year beginning after November 15, 2009.  The Company does not believe that adoption of the amendment to ASC 810-10-15-13 will impact its financial position, results of operations or cash flows.

In June 2009, the FASB issued FASB Statement No. 166, “Accounting for Transfer of Financial Assets – an amendment of FAS 140” (“FAS 166”) which seeks to enhance the information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. FAS 166 was formally included into the FASB codification in December 2009, under ASC 860, “Transfers and Servicing.”  The amendment is effective as of the first fiscal year beginning after November 15, 2009.  The Company does not believe that adoption of FAS 166 will materially impact its financial position, results of operations or cash flows.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), which provides additional guidance to improve disclosures regarding fair value measurements by adding two new disclosure requirements: (1) transfers in and out of Level 1 and 2 measurements and the reasons for the transfers, and (2) a gross presentation of activity within the Level 3 roll-forward.  It also provides clarification on the level of disaggregation of fair value measurements and disclosures on inputs and valuation techniques.  The new requirements and guidance are effective for periods beginning after December 15, 2009, except for the Level 3 roll-forward which is effective for fiscal years beginning after December 15, 201 0.  The Company does not believe that adoption of this guidance will have a material impact to its financial position, results of operations or cash flows.

30

CANADIAN ZINC CORPORATION

(a development stage company)

Notes to the Financial Statements

December 31, 2009

(Tabular amounts are in thousands of Canadian dollars, except for shares, price per share and per share amounts)

21.         Commitments

(a) The Company has entered into operating lease agreements for office space.  These agreements require the Company to make the following lease payments:

		Office Leases
Year ending December 31, 2010	$	148
Year ending December 31, 2011		134
Year ending December 31, 2012		78
	$	360

(b) The Company has a letter of guarantee outstanding in the amount of $214,000 as security for the Company fulfilling certain obligations pursuant to an Authorization granted by DFO relating to road repairs in proximity to the Prairie Creek Mine Site (see Notes 9 and 10).

22.         Subsequent events

Subsequent to December 31, 2009:

(a) 2,460,000 stock options at an exercise price of $0.60 per common share were forfeited having reached their expiry date and 30,000 stock options at an exercise price of $0.94 per common share expired following termination of an employee.

31