Financial Statements
 
 (A
Development Stage Company)
 December
31, 2008, 2007 and 2006
 
 
 Index
 
 Report of Independent Auditors
 Balance Sheets
 Statements of Operations, Comprehensive Income and
Deficit
 Statements of Cash Flows
 Statements of Shareholders’ Equity
 Notes to Financial Statements
  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, 2008 and 2007 and the statements of operations, comprehensive
income and deficit, shareholders’ equity and cash flows for each of the years in
the three-year period ended December 31, 2008. 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, 2008 and 2007 and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2008 in conformity with Canadian generally
accepted accounting principles.
  As
discussed in note 2 to the financial statements, in 2008, the Company changed
its policy of accounting for exploration and development costs.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008 and 2007, 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 9, 2009 expressed an unqualified opinion thereon.
   
  Vancouver,
Canada,
 March 9,
2009. Chartered Accountants
  
  
  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, 2008 and 2007, 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 of 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, 2008 and 2007 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, 2008 and 2007 and the statements
of operations, comprehensive income and deficit, shareholders’ equity and cash
flows for each of the years in the three-year period ended December 31, 2008 and
2007 of the Company and our report dated March 9, 2009 expressed an unqualified
opinion thereon.
    
 Vancouver,
Canada,
 March 9,
2009. Chartered Accountants
  
  
 
  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,
              
              December
      31,2008
              
              2007Restated
      (a)ASSETSCurrentCash
      and cash equivalents
              $
              9,225
              
              $
              6,919Short-term
      investments (Note 5)
              
              11,723
              
              
              21,495Marketable
      securities (Note 6)
              
              2,024
              
              
              100Other
      receivables and prepaid expenses
              
              96
              
              
              172Total
      Current Assets
              
              23,068
              
              
              28,686Other long-term assets(Note 7)
              
              525
              
              
              425Restricted cash (Note
      8)
              
              214
              
              
              -Resource interests (Note
      9)
              
              5,053
              
              
              4,832Plant and equipment
      (Note 11)
              
              661
              
              
              448Total
      Assets
              $
              29,521
              
              $
              34,391LIABILITIESCurrentAccounts
      payable
              $
              314
              
              $
              813Accrued
      liabilities
              
              197
              
              
              441Total
      Current Liabilities
              
              511
              
              
              1,254Asset retirement obligation(Note 12)
              
              1,162
              
              
              1,228Total
      Liabilities
              
              1,673
              
              
              2,482Commitments(Notes 9 and
      20)SHAREHOLDERS'
      EQUITYShare capital(Note
      13)
              
              65,621
              
              
              65,964Contributed surplus(Note 14)
              
              8,354
              
              
              7,844Accumulated
      other comprehensive income
              
              -
              
              
              -Deficit
              
              (46,127
              )
              
              (41,899
              )Total
      Shareholders’ Equity
              
              27,848
              
              
              31,909Total
      Liabilities and Shareholders’ Equity
              $
              29,521
              
              $
              34,391Subsequent events (Note
      21)(a)
      – See Note 2.
 Approved
by the Board of Directors:
 “John
      F. Kearney”
              
              “Brian
      A. Atkins, CA”Director
              
              Director
  See
accompanying notes to the financial
statements.
 4
 CANADIAN ZINC CORPORATION
 (a
development stage company)
 Statements of Operations, Comprehensive Income 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 31,2008
              
              2007
              
              2006Restated
      (a)
              
              Restated
      (a)Income
                Investment
      Income
              $
              899
              
              $
              1,234
              
              $
              948Mineral exploration and
      development costs(Note 10)
              
              3,426
              
              
              11,050
              
              
              8,027ExpensesDepreciation
              
              21
              
              
              13
              
              
              4Listing
      and regulatory fees
              
              48
              
              
              59
              
              
              40Management
      and directors fees
              
              566
              
              
              347
              
              
              318Office
      and general
              
              360
              
              
              463
              
              
              491Professional
      fees
              
              220
              
              
              396
              
              
              256Project
      evaluation
              
              21
              
              
              39
              
              
              31Shareholder
      and investor communications
              
              230
              
              
              420
              
              
              244Stock
      based compensation
              
              205
              
              
              267
              
              
              1,0231,671
              
              
              2,004
              
              
              2,407Other
      income (expenses)Foreign
      exchange gain
              
              8
              
              
              -
              
              
              -Unrealized
      (loss) on securities (Note 6)
              
              (38
              )
              
              (150
              )
              
              -(30
              )
              
              (150
              )
              
              -Loss
      before income taxes
              
              (4,228
              )
              
              (11,970
              )
              
              (9,486
              )Future
      income taxes income (Note 17)
              
              -
              
              
              2,487
              
              
              1,763Net
      loss for the year
              
              (4,228
              )
              
              (9,483
              )
              
              (7,723
              )Other
      comprehensive income/(loss)
              
              -
              
              
              -
              
              
              -Comprehensive
      loss
              $
              (4,228
              )
              $
              (9,483
              )
              $
              (7,723
              )Deficit, beginning of
      year
              $
              (41,899
              )
              $
              (32,416
              )
              $
              (24,693
              )Net
      loss
              
              (4,228
              )
              
              (9,483
              )
              
              (7,723
              )Deficit, end of
      year
              $
              (46,127
              )
              $
              (41,899
              )
              $
              (32,416
              )Loss per share - basic
      and diluted
              $
              (0.04
              )
              $
              (0.08
              )
              $
              (0.08
              )Weighted average number of
      common  shares outstanding – basic and
      diluted
              
              120,440,062
              
              
              113,429,078
              
              
              94,734,979
 
  (a) See
Note 2.
   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 31,2008
              
              2007
              
              2006Restated
      (a)
              
              Restated
      (a)Operating
      ActivitiesNet
      loss for the year
              $
              (4,228
              )
              $
              (9,483
              )
              $
              (7,723
              )Reclamation
      expenditures
              
              (286
              )
              
              (246
              )
              
              -Adjustment
      for items not involving cash:-
      Accretion and depreciation
              
              281
              
              
              233
              
              
              133-
      Future income taxes
              
              -
              
              
              (2,487
              )
              
              (1,763
              )-
      Write-off of mining equipment
              
              -
              
              
              -
              
              
              27-
      Unrealized loss on securities (Note 6)
              
              38
              
              
              150
              
              
              --
      Stock based compensation
              
              205
              
              
              267
              
              
              1,023Change
      in non-cash working capital items:-
      other receivables and prepaid expenses
              
              76
              
              
              98
              
              
              (246
              )-
      accounts payable and accrued liabilities
              
              (836
              )
              
              790
              
              
              416(4,750
              )
              
              (10,678
              )
              
              (8,133
              )Financing
      ActivitiesCapital
      stock issued and subscribed, net of issuance costs
              
              340
              
              
              10,184
              
              
              22,037Capital
      stock repurchased (Note 13)
              
              (378
              )
              
              -
              
              
              -(38
              )
              
              10,184
              
              
              22,037Investing
      ActivitiesPlant
      and equipment
              
              (402
              )
              
              (149
              )
              
              (426
              )Short-term
      investments
              
              9,772
              
              
              (6,016
              )
              
              (15,479
              )Restricted
      cash
              
              (214
              )
              
              -
              
              
              -Marketable
      securities
              
              (1,962
              )
              
              -
              
              
              (250
              )Other
      long-term assets
              
              (100
              )
              
              (30
              )
              
              (205
              )7,094
              
              
              (6,195
              )
              
              (16,360
              )Increase
      (decrease) in cash and cash equivalents
              
              2,306
              
              
              (6,689
              )
              
              (2,456
              )Cash and cash equivalents,beginning of year
              
              6,919
              
              
              13,608
              
              
              16,064Cash and cash
      equivalents, end of year
              $
              9,225
              
              $
              6,919
              
              $
              13,608Supplemental
      Information:Interest
      paid
              $
              -
              
              $
              -
              
              $
              -Income
      taxes paid
              $
              -
              
              $
              -
              
              $
              -
  (a) – See
Note 2.
   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)
  (in
      thousands of Canadian dollars except for share amounts)
              Common
      shares
              
              ContributedShares
              Amount
              
              Surplus
              
              Deficit
              
              TotalRestated
      (a)
              
              
              
              Restated
      (a)
              
              Restated
      (a)Balance, December 31,
      2005
              79,747,212
              $
              43,067
              $
              1,479
              $
              (24,693)
              $
              19,853Issue
      of shares at $0.72 per share
              13,333,333
              
              9,600
              
              -
              
              -
              
              9,600Issuance
      costs
              -
              
              (768)
              
              -
              
              -
              
              (768)Share
      purchase warrants
              -
              
              (2,264)
              
              2,264
              
              -
              
              -Broker
      warrants issued at $0.72 per share
              -
              
              (773)
              
              773
              
              -
              
              -Broker
      warrants issued at $1.00 per share
              -
              
              (320)
              
              320
              
              -
              
              -Exercise
      of warrants between $0.55 - $0.85 per share
              1,307,590
              
              1,215
              
              (394)
              
              -
              
              821Exercise
      of options at $0.60 per share
              690,000
              
              670
              
              (255)
              
              -
              
              415Issue
      of flow-through shares at $1.15 per share
              6,956,522
              
              8,000
              
              -
              
              -
              
              8,000Issuance
      costs
              -
              
              (1,030)
              
              -
              
              -
              
              (1,030)Issue
      of shares at $0.90 per unit
              5,555,555
              
              5,000
              
              -
              
              -
              
              5,000Share
      purchase warrants
              -
              
              (845)
              
              845
              
              -
              
              -Broker
      warrants issued at $0.93 per share
              -
              
              (167)
              
              167
              
              -
              
              -Broker
      warrants issued at $1.15 per share
              -
              
              (257)
              
              257
              
              -
              
              -Future
      income tax effect of flow-through shares
              -
              
              (1,763)
              
              -
              
              -
              
              (1,763)Stock-based
      compensation
              -
              
              -
              
              1,023
              
              -
              
              1,023Net
      loss for the year
              -
              
              -
              
              -
              
              (7,723)
              
              (7,723)Balance, December 31,
      2006
              107,590,212
              $
              59,365
              $
              6,479
              $
              (32,416)
              $
              33,428Exercise
      of options at $0.23 per share
              450,000
              
              131
              
              (27)
              
              -
              
              104Future
      income tax effect of flow-through shares
              -
              
              (2,487)
              
              -
              
              -
              
              (2,487)Exercise
      of options at $0.89 per share
              100,000
              
              153
              
              (64)
              
              -
              
              89Exercise
      of warrants between $0.72 - $0.93 per share
              302,738
              
              394
              
              (174)
              
              -
              
              220Issue
      of shares at $0.85 per unit
              11,765,000
              
              9,766
              
              -
              
              -
              
              9,766Share
      purchase warrants
              -
              
              (1,366)
              
              1,366
              
              -
              
              -Exercise
      of warrants at $0.72 per share
              6,012
              
              8
              
              (3)
              
              -
              
              5Stock-based
      compensation
              -
              
              -
              
              267
              
              -
              
              267Net
      loss for the year
              -
              
              -
              
              -
              
              (9,483)
              
              (9,483)Balance, December 31,
      2007
              120,213,962
              $
              65,964
              $
              7,844
              $
              (41,899)
              $
              31,909Exercise
      of warrants at $0.72 per share
              471,101
              
              613
              
              (273)
              
              -
              
              340Shares
      cancelled under normal course issuer bid
              (1,716,000)
              
              (956)
              
              578
              
              -
              
              (378)Stock-based
      compensation
              -
              
              -
              
              205
              
              -
              
              205Net
      loss for the year
              -
              
              -
              
              -
              
              (4,228)
              
              (4,228)Balance, December 31,
      2008
              118,969,063
              $
              65,621
              $
              8,354
              $
              (46,127)
              $
              27,848(a)
      – See Note 2
  See
accompanying notes to the financial statements.
 7
 CANADIAN ZINC CORPORATION
 (a
development stage company)
 Notes to the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
  1.           Nature
of Operations and Going Concern
 
 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 9).
 
 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 several years from the
current date.  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.           Change
in Accounting Policy
 
 During
2008, the Company commenced its review of the impact of International Financial
Reporting Standards (“IFRS”) (see Note 4(d)) on its current accounting
policies.  Part of this initial review included an examination of the
Company’s current accounting policies.  In light of this review, the
Company determined that it was appropriate to change its accounting policy for
resource interests whereby exploration and development costs are to be expensed
until such time as either reserves are proven or permits to operate a mineral
resource property are received and financing to complete development has been
obtained.  Previously, the Company capitalized its exploration and
development expenditures as incurred, which is permitted under Canadian
generally accepting accounting principles (“Canadian GAAP”).
 
 Management
believes that this revised accounting policy will provide a more relevant and
reliable basis of accounting.  Among other benefits, the revised
accounting policy aligns the accounting treatment of resource interest
expenditures with standards used by producing mining companies in the resource
sector and with global accounting standards (including the accounting principles
generally accepted in the United States of America (“U.S.
GAAP”)).  The change in accounting policy has been applied
retrospectively, and the comparative statements for 2007 and 2006 have been
restated.
 
  8
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
  2.           Change
in Accounting Policy (continued)
 
 The
effect of the change was to increase the accumulated deficit at January 1, 2006
by $13.490 million and at January 1, 2007 by $19.727 million. Further impacts of
the restatement are noted in the table below:
 
 As
      Previously Reported
              
              
              Adjustment
              
              
              RestatedBalance
      Sheet as at December 31, 2007:Resource
      interests
              
              $
              37,797
              
              
              $
              (32,965
              )
              
              $
              4,832Other
      long-term assets
              
              
              -
              
              
              
              425
              
              
              
              425Future
      income tax liability
              
              
              (3,621
              )
              
              
              3,621
              
              
              
              -Share
      capital
              
              
              66,593
              
              
              
              (629
              )
              
              
              65,964Deficit
              
              
              (13,609
              )
              
              
              (28,290
              )
              
              
              (41,899
              )Statement
      of Operations, Comprehensive Income and Deficit for the year ended
      December 31, 2007:Mineral
      exploration and development costs
              
              
              -
              
              
              
              (11,050
              )
              
              
              (11,050
              )Future
      income taxes income
              
              
              -
              
              
              
              2,487
              
              
              
              2,487Net
      loss / Comprehensive loss for year
              
              
              (920
              )
              
              
              (8,563
              )
              
              
              (9,483
              )Loss
      per share – basic and diluted
              
              
              (0.01
              )
              
              
              (0.07
              )
              
              
              (0.08
              )Statement
      of Cash Flows for the year ended December 31, 2007:Operating
      activities
              
              
              (569
              )
              
              
              (10,109
              )
              
              
              (10,678
              )Investing
      activities
              
              
              (16,304
              )
              
              
              10,109
              
              
              
              (6,195
              )Balance
      Sheet as at December 31, 2006:Resource
      interests
              
              
              26,700
              
              
              
              (21,885
              )
              
              
              4,815Other
      long-term assets
              
              
              -
              
              
              
              395
              
              
              
              395Future
      income tax liability
              
              
              (1,134
              )
              
              
              1,134
              
              
              
              -Share
      capital
              
              
              59,994
              
              
              
              (629
              )
              
              
              59,365Deficit
              
              
              (12,689
              )
              
              
              (19,727
              )
              
              
              (32,416
              )Statement
      of Operations, Comprehensive Income and Deficit for the year ended
      December 31, 2006:Mineral
      exploration and development costs
              
              
              -
              
              
              
              (8,027
              )
              
              
              (8,027
              )Write-off
      of mining equipment
              
              
              (27
              )
              
              
              27
              
              
              
              -Future
      income taxes income
              
              
              -
              
              
              
              1,763
              
              
              
              1,763Net
      loss / Comprehensive loss for year
              
              
              (1,486
              )
              
              
              (6,237
              )
              
              
              (7,723
              )Loss
      per share – basic and diluted
              
              
              (0.02
              )
              
              
              (0.06
              )
              
              
              (0.08
              )Statement
      of Cash Flows for the year ended December 31, 2006:Operating
      activities
              
              
              (262
              )
              
              
              (7,871
              )
              
              
              (8,133
              )Investing
      activities
              
              $
              (24,231
              )
              
              $
              7,871
              
              
              $
              (16,360
              )
 
 
  9
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
  3.
              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 19.
 
 (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.
 
 (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
(see Note 5), marketable securities (see Note 6) and restricted cash as held for
trading.
 
  10
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
  3.
              Significant
      Accounting Policies (continued)
 
 (b)
              Financial Instruments
      (continued)
 
 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.  The Company’s cash and cash equivalents at December 31,
2008 consisted of cash of $264,000 and cash equivalents of $8.961 million (2007
– cash of $728,000 and cash equivalents of $6.191 million).
 
 (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.
 
 (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).
  11
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
  3.
              Significant
      Accounting Policies (continued)
 
 (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 reporting
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%Computer
      equipment
              30%
 
 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.
 
  12
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
  3.
              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 re-measurement
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)
              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 measured and
recorded based on discounted estimated future cash flows or the application of
an expected present value technique to estimate fair value in the absence of a
market price.
 
 
 
  13
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
  3.
              Significant
      Accounting Policies (continued)
 
 (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 2008, 2007 and 2006, the stock options and
share purchase warrants as disclosed in Note 14 were not included in the
computation of loss per share as such inclusion would be
anti-dilutive.
 
 (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.
  14
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
   3.
              Significant
      Accounting Policies (continued)
 
 (p)
              Stock-based
      Compensation
 
 The
Company follows the fair value method of accounting for the stock options 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.
 
  4.           Accounting
Changes
 
 On
January 1, 2008, the Company adopted the recommendations included in the
following Sections of the CICA Handbook: Section 1400, “General Standards of
Financial Statement Presentation,” Section 1535, “Capital Disclosures,” Section
3862, “Financial Instruments – Disclosure” and Section 3863, “Financial
Instruments – Presentation.”
 
 (a)
              Section 1400, “General
      Standards of Financial Statement
  Presentation”
 
 This
Section establishes standards for assessing a company’s ability to continue as a
going concern and disclosing any material uncertainties that cast doubt upon its
ability to continue as a going concern.  The Company’s disclosure
reflects such assessment and discussion (see Note 1).
 
 (b)
              Section 1535, “Capital
      Disclosures”
 
 This
Section establishes standards for disclosing information about a company’s
capital and how it is managed.  Under this standard the Company is
required to disclose the following, based on the information provided internally
to the Company’s key management personnel:
 
 (i)       qualitative
information about its objectives, policies and processes for managing
capital;
 (ii)       summary
quantitative data about what it manages as capital;
 (iii)
              whether
      during the period it complied with any externally imposed capital
      requirements to which the Company is subject;
  and
 (iv)
              when
      the Company has not complied with such externally imposed capital
      requirements (if any), the consequences of such
      non-compliance.
 
 See Note
15 for disclosures related to the Company’s objectives, policies and processes
for managing capital.
  15
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
  4.           Accounting
Changes (continued)
 
 (c)
              Section 3862,
      “Financial Instruments – Disclosure” and Section 3863, “Financial
      Instruments – Presentation”
 
 The new
disclosure and presentation standards require companies to provide disclosure of
quantitative and qualitative information in their financial statements that
enable users to evaluate (a) the significance of financial instruments for the
company’s financial position and performance; and (b) the nature and extent of
risks arising from financial instruments to which the entity is exposed during
the period and at the balance sheet date, and management’s objectives, policies
and procedures for managing such risks.  Companies are required to
disclose the measurement basis or bases used, and the criteria used to determine
classification for different types of instruments.
 
 The
Section requires specific disclosures to be made, including the criteria
for:
 
 (i)       designating
financial assets and liabilities as held for trading;
 (ii)       designating
financial assets as available-for-sale; and
 (iii)
              determining
      when impairment is recorded against the related financial asset or when an
      allowance account is used.
 
 See Note
18 for disclosures related to financial instruments.
 
 (d)
              New Canadian
      Accounting Standards
 
 In
February 2008, the CICA Accounting Standards Board (“CICA”) 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 assessing the impact
of the implementation of IFRS.
 
 Section
3064, Goodwill and Intangible Assets
 
 In
February 2008, the CICA issued this new Section 3064 to replace Section 3062,
“Goodwill and Other Intangible Assets” and establish standards for the
recognition, measurement and disclosure of goodwill and intangible
assets.  In addition, the CICA issued amendments to Section 1000,
“Financial Statement Concepts” and Accounting Guideline 11, “Enterprises in the
Development Stage” and withdrew Section 3450, “Research and Development
Costs.”  Furthermore, Emerging Issues Committee (EIC) Abstract 27,
“Revenues and Expenditures during the Pre-operating Period” is no longer
applicable for companies that have adopted CICA 3064.  The mandatory
effective date is for annual and interim financial statements for years
beginning on/after October 1, 2008 (i.e., January 1, 2009).  The
Company does not believe that Section 3064 will have a significant impact on its
financial statements under current operating conditions but could have an impact
on the future accounting treatment of expenditures on mineral property
development once mineral reserves have been proved or an operating permit
received and financing for development obtained (see Notes 3(h) and
3(i)).
  16
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
   4.           Accounting
Changes (continued)
 
 (d)
 New Canadian
Accounting Standards(continued)
 
 Sections
1582, Business Combinations, 1601, Consolidations and 1602, Non-controlling
Interests
 
 In
January 2009, the CICA issued these new sections 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 income will be allocated between the controlling
and non-controlling interests.  These new standards will apply to
fiscal years beginning on or after January 1, 2011.  The Company does
not believe that these new Sections will have an impact on its financial
statements unless the Company enters into a business acquisition subsequent to
January 1, 2011.
 
 
 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.  As at December
31, 2008, short-term investments were valued at $11.723 million, earning
investment income at rates ranging from 1.48% to 4.20% (2007 - $21.495 million,
earning income at rates ranging from 3.40% to 5.75%).  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;
accrued interest earned but not yet received is included in other receivables on
the balance sheet.  The market value of these assets is based upon
quoted market values and the recorded amounts at December 31, 2008 approximate
fair value for these investments.
 
  17
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (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.
 
 Held
      for Trading
              #
      of Shares
              
              Original
                Cost
              
              Fair
                Value
      – December 31, 2008
              
              Cumulative
                Gain
      (Loss)Alcoa
      Inc.
              
              16,800
              
              $
              210
              
              $
              230
              
              $
              20Anglo
      American plc
              
              23,000
              
              
              286
              
              
              325
              
              
              39BHP
      Billiton Ltd.
              
              8,000
              
              
              328
              
              
              418
              
              
              90Copper
      Mesa Mining Corp.
              
              764,595
              
              
              250
              
              
              23
              
              
              (227
              )Freeport-McMoRan
      Copper & Gold Inc.
              
              12,000
              
              
              337
              
              
              358
              
              
              21Rio
      Tinto plc
              
              3,500
              
              
              497
              
              
              379
              
              
              (118
              )Teck
      Cominco Limited
              
              11,600
              
              
              99
              
              
              70
              
              
              (29
              )Companhia
      Vale do Rio Doce
              
              15,000
              
              
              205
              
              
              221
              
              
              16$
              2,212
              
              $
              2,024
              
              $
              (188
              )
 
 
 Held
      for Trading
              #
      of Shares
              
              Original
                Cost
              
              Fair
                Value
      – December 31, 2007
              
              Cumulative
                Gain
      (Loss)Copper
      Mesa Mining Corp.
              
              764,595
              
              $
              250
              
              $
              100
              
              $
              (150
              )
 
 
 7.           Other
long-term assets
 
 Other
long-term assets of $525,000 (2007 - $425,000) consist of reclamation security
deposits that the Company has lodged with government agencies as security in
support of certain reclamation obligations.
 
 
 8.           Restricted
Cash
 
 The
Company has $214,000 (2007 - $nil) 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
from Department of Fisheries and Oceans Canada (“DFO”) (see Notes 9 and
20).
 
  18
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
 9.           Resource
Interests
 
 The
Company’s resource interests comprise the Prairie Creek Mine
Property.  During the year ended December 31, 2008, the Company
changed its accounting policy, with retrospective effect, for resource interests
as described in Note 2 to these financial statements.
 
 December
      31,
                2008
              
              December
      31, 2007Restated
      – Note 2Acquisition
      costs:-
      mining lands
              $
              3,158
              
              $
              3,158-
      plant and mill
              
              500
              
              
              5003,658
              
              
              3,658Asset
      retirement obligation
              
              1,395
              
              
              1,174$
              5,053
              
              $
              4,832
 
 The asset
retirement obligation balance included within resource interests represents the
“asset” portion of amounts initially recorded to correspond with the asset
retirement obligation liability (see Note 12).  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, 2006 is noted below.
 
 On April
10, 2007, the Mackenzie Valley Land and Water Board (the “Water Board”) issued a
Land Use Permit for use of the road which connects the Prairie Creek Mine with
the Liard Highway.  The Land Use Permit (MV2003F0028) is valid for
five years to April 10, 2012.  Under the terms of the Permit, a
security deposit in the amount of $100,000 was payable prior to the first use of
the road.  This amount was paid to the Water Board on July 16,
2008.
 
 On March
20, 2008, the 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.
 
  19
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
 10.           Mineral
Exploration and Development Costs
 
 The
Company conducted an underground drilling program at the Prairie Creek Mine that
commenced in 2006 and continued through to the end of 2007.  During
the year ended December 31, 2008, the Company incurred further expenditures
relating to the demobilization of the contractor’s equipment and finalization of
the work program.  In April 2008, the Company received a cost recovery
of $942,000 related to its drilling program.
 
 Mineral
exploration and development costs incurred in 2008, 2007 and 2006 are detailed
below:
 
 2008
              
              2007
              
              2006Restated
      – Note 2
              
              Restated
      – Note 2Mineral
      exploration and development costsAssaying
      and metallurgical studies
              $
              154
              
              $
              307
              
              $
              275Camp
      operation and project development
              
              2,464
              
              
              2,804
              
              
              1,991Drilling
      and underground exploration
              
              170
              
              
              6,076
              
              
              4,226Insurance,
      lease rental
              
              80
              
              
              102
              
              
              73Permitting
      and environmental
              
              862
              
              
              694
              
              
              579Transportation
      and travel
              
              390
              
              
              847
              
              
              7544,120
              
              
              10,830
              
              
              7,898Drilling
      and underground development cost recovery
              
              (942
              )
              
              -
              
              
              -Depreciation
      – mining plant and equipment
              
              168
              
              
              143
              
              
              51Asset
      retirement accretion
              
              80
              
              
              77
              
              
              78248
              
              
              220
              
              
              129Total mineral exploration and
      development costs for the year
              
              3,426
              
              
              11,050
              
              
              8,027Mineral exploration and
      development costs, beginning of year
              
              32,567
              
              
              21,517
              
              
              13,490Mineral exploration and
      development costs, end of year
              $
              35,993
              
              $
              32,567
              
              $
              21,517
 
  20
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
 11.           Plant
and Equipment
 
 December
      31, 2008Cost
              
              Accumulated
                Amortization
              
              Net
      Book
                ValueMining
      equipment
              $
              1,073
              
              $
              510
              
              $
              563Pilot
      plant
              
              108
              
              
              90
              
              
              18Furniture,
      fixtures & equipment
              
              129
              
              
              90
              
              
              39Leasehold
      improvements
              
              60
              
              
              19
              
              
              41$
              1,370
              
              $
              709
              
              $
              661
 
 
 December
      31, 2007Cost
              
              Accumulated
                Amortization
              
              Net
      Book
                ValueMining
      equipment
              $
              693
              
              $
              349
              
              $
              344Pilot
      plant
              
              108
              
              
              82
              
              
              26Furniture,
      fixtures & equipment
              
              107
              
              
              81
              
              
              26Leasehold
      improvements
              
              60
              
              
              8
              
              
              52$
              968
              
              $
              520
              
              $
              448
  
 12.           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, 2008, is estimated
to be $2.383 million
 (2007 -
$2.528 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 $1.162 million as at
December 31, 2008 (2007 - $1.228 million).  In determining the fair
value of the asset retirement obligation, the Company has assumed a long-term
inflation rate of 2.5% (2007 – 2.5%), a credit-adjusted risk-free discount rate
of 6.5% (2007 – 6.5%) and a weighted average useful life of production
facilities and equipment of 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.
 
  21
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
  12.           Asset
Retirement Obligation (continued)
 
 A summary
of the Company’s provision for asset retirement obligation and reclamation is
presented below:
 
 2008
              
              2007Balance
      – beginning of year
              $
              1,228
              
              $
              1,380Reclamation
      activity
              
              (366
              
              
              (246
              )Accretion
              
              80
              
              
              77Change
      in estimates
              
              220
              
              
              17Balance
      – end of year
              $
              1,162
              
              $
              1,228
 
 During
      the year ended December 31, 2008, the Company’s reclamation activities
      reduced the asset retirement obligation by $366,000 (2007 -
      $246,000).
 
 
 13.
              Share
      Capital
 
 Authorized:
Unlimited common shares with no par value (2007 – unlimited).
 
 Issued
and outstanding: 118,969,063 common shares (2007 – 120,213,962).
 
 (a)
              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.
 
 (b)
              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 14(b)).  Share issue costs relating to the transaction
      amounted to $233,918.
 
  22
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
  13.
              Share
      Capital (continued)
 
 (c)
              During
      the year ended December 31, 2006:
 
 i.
              In
      January 2006, the Company completed an underwritten private placement for
      total proceeds of $9.6 million, through the issuance of 13,333,333 units,
      priced at $0.72 per unit.  Each unit consisted of one common
      share and one-half share purchase warrant (6,666,666 warrants)exercisable
      to purchase one common share at a price of $1.00 per share for a period of
      two years.  A value of $2,263,858 was assigned to the warrants
      issued and added to contributed surplus.  The fair value of the
      warrants was $0.34 each.  Share issue costs related to the
      transaction amounted to $768,141.
 
 Commission
related to the private placement was 7% in cash and underwriter’s warrants
(1,333,333 warrants) exercisable for units in the amount of 10% of the number of
units sold at $0.72 per unit for a period of two years.  A value of
$773,333 was assigned to the warrants issued and added to contributed
surplus.
 
 On June
14, 2006, at the Company’s Annual Meeting, shareholders approved the issuance to
Northern Securities Inc. of underwriters options on 1,333,333 units, exercisable
for a period of two years from January 30, 2006 at $0.72 per unit, with each
unit consisting of one common share and one half share purchase warrant (666,666
warrants) exercisable at $1.00 per share for a period of two years, pursuant to
the underwritten financing of the Company completed in January
2006.  A value of $319,999 was assigned to the broker warrants issued
and added to contributed surplus.
 
 ii.
              In
      November 2006, the Company completed an underwritten private placement for
      total proceeds of $13 million consisting of 5,555,555 units at $0.90 per
      unit and 6,956,522 Flow-Through Shares at $1.15 per Flow-Through
      Share.  Each unit consisted of one common share and one-half
      share purchase warrant (2,777,778 warrants).  Each full warrant
      is exercisable to purchase one common share at a price of $1.15 per share
      until November 23, 2008.  A value of $845,077 was assigned to
      the warrants issued and added to contributed surplus.  Share
      issue costs related to the transaction amounted to
    $1,029,783.
 
 A
commission of 7% in cash was paid and broker warrants equal to 7% of the
5,555,555 units sold in the offering were issued (388,889
warrants).  Each broker warrant is exercisable at $0.93 into one
broker unit consisting of one common share and one-half warrant (194,444
warrants), with each whole warrant exercisable at $1.15 until November 23,
2008.  Values of $166,549 and $73,362 were assigned to the broker
warrants and half warrants respectively.
 
 In
addition, a commission of broker warrants of 7% of the Flow-Through Shares were
issued (486,957 warrants).  Each broker flow through warrant is
exercisable into one common share at $1.15 until November 23, 2008.  A
value of $183,723 was assigned to the broker warrants issued.
 
 iii.
              1,307,590
      broker warrants were exercised between $0.55 to $0.85 per common share for
      total proceeds of $821,101.
 
 iv.                690,000
stock options were exercised at $0.60 per common share for proceeds of
$414,000.
 
  23
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
 14.           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, 2008, 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, 2008, 2007 and 2006 and the changes for the years then ended is
presented below:
 
 2008
              
              2007
              
              2006Number
      of Options
              
              Weighted
      Average
                Exercise
      Price
              
              Number
      of Options
              
              Weighted
      Average
                Exercise
      Price
              
              Number
      of Options
              
              Weighted
      Average
                Exercise
      PriceOutstanding,
      beginning of year
              4,865,000
              $
              0.73
              
              4,780,000
              $
              0.66
              
              4,000,000
              $
              0.56Granted
              -
              
              -
              
              695,000
              
              0.94
              
              1,500,000
              
              0.90Exercised
              -
              
              -
              
              (550,000)
              
              0.35
              
              (690,000)
              
              0.60Cancelled
              (660,000)
              
              0.72
              
              (60,000)
              
              0.89
              
              (30,000)
              
              0.89Outstanding,
      end of year
              4,205,000
              $
              0.73
              
              4,865,000
              $
              0.73
              
              4,780,000
              $
              0.66
 
 As at
December 31, 2008, the Company has outstanding stock options to purchase an
aggregate 4,205,000 common shares as follows:
 
 Options
      Outstanding and ExercisableNumber
              
              Weighted
      Average Exercise Price
              Expiry
      Date2,460,000
              $
              0.60
              January
      14, 2010110,000
              
              0.89
              June
      27, 20111,000,000
              
              0.90
              December
      13, 2011635,000
              
              0.94
              October
      15, 20124,205,000
              $
              0.73
 
  24
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
 14.           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; 2006 –
$1.023 million) upon the vesting of stock options granted to directors,
officers, employees and contractors in the year ended December 31,
2007.  This amount was determined using the Black-Scholes option
pricing model, based on the following terms and assumptions:
 
 2008
              2007
              2006Dividend
      Yield
              N/a
              0%
              0%Risk
      free interest rate
              N/a
              4.07%
              4.02%Expected
      life
              N/a
              5  years
              5
      yearsExpected
      volatility
              N/a
              89%
              101%
 
 
 (b)           Warrants
 
 A summary
of the Company’s warrants issued and outstanding as at December 31, 2008, 2007
and 2006 and the changes for the years then ended is presented
below:
 
 2008
              
              2007
              
              2006Number
      of Warrants
              
              Weighted
      Average
                Exercise
      Price
              
              Number
      of Warrants
              
              Weighted
      Average
                Exercise
      Price
              
              Number
      of Warrants
              
              Weighted
      Average
                Exercise
      PriceOutstanding,
      beginning of year
              17,569,243
              $
              1.02
              
              11,995,493
              $
              1.02
              
              788,350
              $
              0.57Granted
              -
              
              -
              
              5,882,500
              
              1.20
              
              12,514,733
              
              1.01Exercised
              (471,101)
              
              0.72
              
              (308,750)
              
              0.73
              
              (1,307,590)
              
              0.63Expired
              (11,215,642)
              
              1.04
              
              -
              
              -
              
              -
              
              -Outstanding,
                end
      of year
              5,882,500
              $
              1.20
              
              17,569,243
              $
              1.09
              
              11,995,493
              $
              1.02
 
 As at
December 31, 2008, the Company has outstanding warrants to purchase an aggregate
5,882,500 common shares at an exercise price of $1.20 per warrant, expiring July
23, 2009.
 
  25
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
 14.           Stock
Options and Warrants (continued)
 
 (b)           Warrants
(continued)
 
 No
warrants were issued in the year ended December 31, 2008.  The fair
value of the warrants issued during the years ended December 31, 2007, and 2006
was determined using the Black-Scholes option pricing model based upon the
following terms and assumptions:
 
 
 2008
              2007
              2006Dividend
      Yield
              N/a
              0%
              0%Risk
      free interest rate
              N/a
              3.96%
              3.26%Expected
      life
              N/a
              2  years
              2
      yearsExpected
      volatility
              N/a
              67%
              71%
 
 
 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 13(b)(iv)).
 
 
 
 
 
  26
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
 14.           Stock
Options and Warrants (continued)
 
 (c)           Contributed
Surplus
 
 A summary of the contributed surplus
account is presented below:
 
 Options
              
              Warrants
              
              Unexercised
      Options and Warrants
              
              Normal
      Course Issuer Bid
              
              TotalBalance,
      December 31, 2005
              $
              1,350
              
              $
              129
              
              $
              -
              
              $
              -
              
              $
              1,479Stock
      options issued
              
              1,023
              
              
              -
              
              
              -
              
              
              -
              
              
              1,023Stock
      options exercised
              
              (255
              )
              
              -
              
              
              -
              
              
              -
              
              
              (255
              )Stock
      options cancelled
              
              (114
              )
              
              -
              
              
              114
              
              
              -
              
              
              -Warrants
      issued
              
              -
              
              
              4,626
              
              
              -
              
              
              -
              
              
              4,626Warrants
      exercised
              
              -
              
              
              (394
              )
              
              -
              
              
              -
              
              
              (394
              )Balance,
      December 31, 2006
              
              2,004
              
              
              4,361
              
              
              114
              
              
              -
              
              
              6,479Stock
      options issued
              
              267
              
              
              -
              
              
              -
              
              
              -
              
              
              267Stock
      options exercised
              
              (91
              )
              
              -
              
              
              -
              
              
              -
              
              
              (91
              )Stock
      options cancelled
              
              (38
              )
              
              -
              
              
              38
              
              
              -
              
              
              -Warrants
      issued
              
              -
              
              
              1,366
              
              
              -
              
              
              -
              
              
              1,366Warrants
      exercised
              
              -
              
              
              (177
              )
              
              -
              
              
              -
              
              
              (177
              )Balance,
      December 31, 2007
              
              2,142
              
              
              5,550
              
              
              152
              
              
              -
              
              
              7,844Stock-based
      compensation
              
              205
              
              
              -
              
              
              -
              
              
              -
              
              
              205Stock
      options cancelled
              
              (311
              )
              
              -
              
              
              311
              
              
              -
              
              
              -Warrants
      expired
              
              -
              
              
              (1,262
              )
              
              1,262
              
              
              -
              
              
              -Broker
      warrants exercised
              
              -
              
              
              (273
              )
              
              -
              
              
              -
              
              
              (273
              )Shares
      cancelled under normal course issuer bid
              
              -
              
              
              -
              
              
              -
              
              
              578
              
              
              578Balance,
      December 31, 2008
              $
              2,036
              
              $
              4,015
              
              $
              1,725
              
              $
              578
              
              $
              8,354
 
 
  27
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
 15.           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
Compensation 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.  As at
December 31, 2008, a total of approximately $1.962 million has been invested in
the equity stock of a number of major mining companies.  The Company
considers that these marketable securities, while acquired as part of a
medium-term investing strategy, are highly liquid assets in view of the average
trading volumes of the shares of the companies acquired.
 
 16.           Related
Party Transactions
 
 The
Company incurred rent expense with corporations with a common director of the
Company in the amount of $19,000 (2007 - $13,000; 2006 -
$12,000).  These transactions were within the normal course of
business and have been recorded at amounts agreed to by the transacting parties.
At December 31, 2008, $10,000 relating to amounts owing to related parties, with
no interest accruing, was included in accounts payable and accrued liabilities
(2007 - $2,000).
 
 17.           Income
Taxes
 
 The
Company’s future income tax income for the year ended December 31, 2008, is $Nil
(2007 - $2.487 million; 2006 - $1.763 million).  A reconciliation of
the statutory tax rate to the effective rate for the Company is as
follows:
 2008
              
              2007
              
              2006Restated
      – Note 2
              
              Restated
      – Note 2Statutory
      tax rate
              
              31.00
              %
              
              34.12
              %
              
              35.01
              %Recovery
      of income taxes computed at statutory rates
              $
              1,311
              
              $
              4,084
              
              $
              3,321Permanent
      differences
              
              (64
              )
              
              (93
              )
              
              (361
              )Expired
      losses
              
              (192
              )
              
              (162
              )
              
              (55
              )Other
              
              (118
              )
              
              281
              
              
              479Income
      tax rate changes
              
              (403
              )
              
              (1,612
              )
              
              (810
              )Change
      in valuation allowance
              
              (534
              )
              
              (11
              )
              
              (811
              )$
              -
              
              $
              2,487
              
              $
              1,763
 
  28
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
 17.           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:
 
 2008
              
              2007
              
              2006Restated
      – Note 2
              
              Restated
      – Note 2Future
      income tax assetsNon-capital
      loss carry forwards
              $
              2,964
              
              $
              2,136
              
              $
              1,672Plant
      and equipment
              
              139
              
              
              183
              
              
              287Resource
      interests
              
              3,234
              
              
              3,310
              
              
              3,367Other
              
              584
              
              
              758
              
              
              1,0506,921
              
              
              6,387
              
              
              6,376Valuation
      allowance
              
              (6,921
              )
              
              (6,387
              )
              
              (6,376
              )Net
      future tax assets
              $
              -
              
              $
              -
              
              $
              -
 
 At
December 31, 2008, the Company has approximately $11.399 million (2007 - $7.912
million) of non-capital losses for tax purposes available to be carried forward
at various dates until 2028 and applied against future income tax for tax
purposes and approximately $17.491 million (2006 - $16.668 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:
 
 Year2009
              $
              5972010
              
              1,0332014
              
              9262015
              
              9362026
              
              1,0462027
              
              2,7552028
              
              4,106$
              11,399
 
 Future
income tax benefits which may arise as a result of these losses have not been
recognized in these financial statements, as their realization is
uncertain.
 
 During
the year ended December 31, 2005, the Company renounced to subscribers of
9,963,457 flow-through shares Canadian Exploration Expenditures (“CEE”) of
$5.675 million.  The Company applied the accounting treatment
recommended by EIC-146 requiring the transaction to be reported in the 2006
fiscal period.  The net effect of the recommendations of EIC-146
resulted in the recognition of the estimated tax benefits renounced by the
Company to the investors in respect of flow-through shares.  As a
result, future income tax income of $1.763 million and a corresponding reduction
in shareholders’ equity was recorded in fiscal 2006.
  29
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
 17.           Income
Taxes (continued)
 
 During
the year ended December 31, 2006, the Company renounced to subscribers of
6,956,522 flow-through shares CEE 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, 2008 and 2007, all of the flow-through
proceeds have been expended.
 
 
 18.           Financial
Instruments
 
 (a)
              Fair
      Values
 
 The
recorded amounts for other 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.
 
 (b)
              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, 2008, a 10% fluctuation 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
$202,000.
 
 (c)
              Interest rate
      risk
 
 Included
in the loss for the year in these financial statements is investment income on
the Company’s cash and cash equivalents and short-term
investments.  If interest rates throughout the year had been 100 basis
points (1%) lower (higher) then net loss would have been approximately $255,000
higher ($255,000 lower).  The Company does not have any debt
obligations which expose it to interest rate risk.
  30
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
 18.           Financial
Instruments (continued)
 
 (d)
              Foreign currency
      risk
 
 The
Company holds certain 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 securities held at December 31, 2008, 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 $16,000
higher (or lower).
 
 (e)
              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,
2008 is $23.186 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.  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 with 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, 2008,
the Company’s cash and cash equivalents, short-term investments and restricted
cash were invested in four financial institutions.
 
 (f)
              Liquidity
      risk
 
 Liquidity
risk encompasses the risk that the Company cannot meet its financial obligations
as they fall due.  As at December 31, 2008, the Company had positive
working capital of $22.557 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.
 
 
  31
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
 19.           Reconciliation
of Canadian and United States Generally Accepted Accounting
Principles
 
 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
 
 2008
              
              2007Restated
      – Note 2Share
      capital (Canadian GAAP)
              $
              65,621
              
              $
              65,964Increase
      due to future income tax recovery on renouncement of flow-through shares
      (c)
              
              4,250
              
              
              4,250Decrease
      due to flow-through share premium paid in excess of market value
      (c)
              
              (1,531
              )
              
              (1,531
              )Share
      capital (U.S. GAAP)
              $
              68,340
              
              $
              68,683Deficit
      (Canadian GAAP)
              $
              (46,127
              )
              $
              (41,899
              )Increase
      due to future income tax recovery on renouncement of flow-through shares
      (c)
              
              (4,250
              )
              
              (4,250
              )Decrease
      due to flow through share premium paid in excess of market value
      (c)
              
              1,531
              
              
              1,531Deficit
      (U.S. GAAP)
              $
              (48,846
              )
              $
              (44,618
              )
 
 Statements of
Operations
 
 2008
              
              2007
              
              2006Restated
      – Note 2
              
              Restated
      – Note 2Net
      loss and comprehensive loss (Canadian GAAP)
              $
              (4,228
              )
              $
              (9,483
              )
              $
              (7,723
              )Flow
      through share premium reversal (c)
              
              -
              
              
              1,531
              
              
              -Future
      income tax recovery elimination (c)
              
              -
              
              
              (2,487
              )
              
              (1,763
              )Net
      loss and comprehensive loss (U.S. GAAP)
              $
              (4,228
              )
              $
              (10,439
              )
              $
              (9,486
              )Loss
      per share
                -
      basic and diluted (U.S. GAAP)
              $
              (0.04
              )
              $
              (0.09
              )
              $
              (0.10
              )Weighted
      average number of common shares outstanding
                -
      basic and diluted (U.S. GAAP)
              
              120,440,062
              
              
              113,429,078
              
              
              94,734,979
 
  32
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
  19.
              Reconciliation
      of Canadian and United States Generally Accepted Accounting Principles
      (continued)
 
 (a)
              Resource
      Interests
 
 During
2008, the Company adopted an accounting policy, under Canadian GAAP, whereby
exploration and development costs are to be expensed until such time as either
mineral reserves are proven or permits to operate a mineral resource property
and financing to complete development are received.  This change in
accounting policy was adopted on a retrospective basis with restatement of the
comparative periods presented.  Previously, the Company capitalized
such expenditures as incurred which is permitted under Canadian
GAAP.  U.S. GAAP requires that exploration costs relating to resource
interests be expensed until there is substantial evidence of economically
recoverable resources.  Accordingly, there is no GAAP difference for
the years ended December 31, 2008, 2007 and 2006.  For the purposes of
U.S. GAAP, the Company is considered to be an Exploration Stage
Enterprise.
 
 (b)
              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.
 
 (c)           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, 2008, there were $Nil in unexpended
flow-through funds (2007 - $Nil).
 
 (d)           Newly Adopted Accounting
Pronouncements
 
 Fair
Value Accounting
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 157, “Fair Value Measurements” (“FAS 157”).  FAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands 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 are
effective for the Company’s fiscal year beginning January 1,
2009.
  33
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
  19.
              Reconciliation
      of Canadian and United States Generally Accepted Accounting Principles
      (continued)
 
 (d)           Newly Adopted Accounting
Pronouncements (continued)
 
 Fair
Value Accounting (continued)
 
 In
October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS
157-3”), which clarifies the application of FAS 157 in an inactive
market.  The intent of this FSP is to provide guidance on how the fair
value of a financial asset is to be determined when the market for that
financial asset is inactive.  FSP FAS 157-3 states that determining
fair value in an inactive market depends on the facts and circumstances,
requires the use of significant judgment and in some cases, observable inputs
may require significant adjustment based on unobservable
data.  Regardless of the valuation technique used, an entity must
include appropriate risk adjustments that market participants would make for
non-performance and liquidity risks when determining fair value of an asset in
an inactive market.  FSP FAS 157-3 was effective upon
issuance.  The Company has incorporated the principles of FSP FAS
157-3 in determining the fair value of financial assets when the market for
those assets is not active.
 
 FAS 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value.  The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements).  The three levels of the
fair value hierarchy under FAS 157 are described below:
 
 Level 1 -
Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities;
 
 Level 2 -
Quoted prices in markets that are not active, or inputs that are observable,
either directly or indirectly, for substantially the full term of the asset or
liability;
 
 Level 3 -
Prices or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable (supported by little or no market
activity).
  
 In
February 2007, the FASB issued FASB Statement No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities” (“FAS
159”).  FAS 159 permits entities to choose to measure eligible
financial instruments and other items at fair value.  The provisions
of FAS 159 were adopted January 1, 2008.  The Company did not
elect the Fair Value Option for any of its financial assets or liabilities, and
therefore, the adoption of FAS 159 had no impact on the Company’s financial
position, results of operations or cash flows.
  34
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
  19.
              Reconciliation
      of Canadian and United States Generally Accepted Accounting Principles
      (continued)
 
 (e)           New Accounting
Pronouncements
 
 Business
Combinations
 
 In
December 2007, the FASB issued FASB Statement No. 141(R), “Business
Combinations” (“FAS 141(R)”) 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 negative
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 (i.e., January 1,
2009 for the Company).  The Company does not believe that FAS 141(R)
will have an impact on its financial statements unless the Company enters into a
business acquisition subsequent to January 1, 2009.
 
 Derivative
Instruments and Hedging Activities
 
  In March
2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“FAS 161”) which requires enhanced
disclosures about how and why a company uses derivative and hedging
activities.  FAS 161 is effective for financial statements issued for
years beginning after November 15, 2008 (i.e., January 1, 2009 for the
Company).  The Company does not expect the adoption of FAS 161 to have
a significant impact on the Company’s financial statements.
 
 Hierarchy
of Generally Accepted Accounting Principles
 
  In May
2008, the FASB issued FASB Statement No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“FAS 162”) which identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of non-governmental entities that are
presented in conformity with GAAP.  FAS 162 is effective 60 days
following the Security and Exchange Commission’s (“SEC”) approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity with GAAP.”  The Company does
not expect the adoption of FAS 162 to have an impact on the Company’s financial
position, results of operations or cash flows.
 
 
  35
 CANADIAN
ZINC CORPORATION
 (a
development stage company)
 Notes to
the Financial Statements
 December
31, 2008
 (Tabular
amounts are in thousands of Canadian dollars, except for shares, price per share
and per share amounts)
 20.           Commitments
 
 (a)
              The
      Company has entered into operating lease agreements for office space and
      equipment.  These agreements require the Company to make the
      following lease payments:
 
 Office
      Leases
              Office
      equipment
              TotalYear
      ending December 31, 2009
              $
              142
              $
              7
              $
              149Year
      ending December 31, 2010
              
              136
              
              -
              
              136Year
      ending December 31, 2011
              
              134
              
              -
              
              134Year
      ending December 31, 2012
              
              78
              
              -
              
              78$
              490
              $
              7
              $
              497
 
 (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 8 and
9).
 
  21.           Subsequent
events
 
 Subsequent
to December 31, 2008:
 
 (a)
              170,000
      stock options at exercise prices between $0.89 to $0.94 per common share
      were cancelled.
 
 (b)
              An
      additional 13,500 common shares were purchased for cancellation pursuant
      to the Company’s Normal Course Issuer Bid for a total expenditure of
      $2,735 or $0.20 per share.
 
 
 22.           Comparative
Figures
 
 Certain
prior year amounts have been reclassified to conform with the presentation
adopted in the current year.
  36