18 January 1996 Internal T.I. 9600446 - INTEREST ON ADDITIONAL CROWN CHARGES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

January 18, 1996

Audit Directorate Income Tax Rulings and
Industry Specialist Services Interpretations Directorate
Bob Neville, Chief Resource Industries Section
Peter Lee
Attention: Rick Langridge 957-8977

960044

Interest Expense on Crown Royalties

This is in reply to your memorandum of January 2, 1996, wherein you requested confirmation of Rulings' position that interest on Crown royalties is deductible under section 9 of the Income Tax Act (the "Act"). You also requested our view on whether such interest expense should not grind resource allowance for the purposes of paragraph 20(1)(v.1) of the Act and draft section 1210 of the Income Tax Regulations (the "Regulations").

1.Whether interest, in particular, interest on Crown royalties, would ever be deductible in computing income pursuant to section 9 of the Act, was previously addressed in our memorandum to you dated June 26, 1991. We confirm that it is still our view that the interest expense on the reassessed additional Crown royalties incurred in the normal course of production of natural resources would be deductible in computing income pursuant to section 9 of the Act, and that paragraph 18(1)(m) would not apply to such interest. This position is consistent with the Department's position on interest deductibility - interest may be deductible under section 9 of the Act in some situations, (see our response to the Roundtable Q.4 in the 1992 Corporate Management Tax Conference which was given after our review of the subject matter in 1991).

2.The March 18, 1993 draft regulations (the "Draft Regulations") would amend section 1210 of the Regulations to exclude any "amounts on account of or in lieu of interest in respect of a debt of the taxpayer" from the resource profits and resource allowance calculations for taxation years ending after December 20, 1991, except that for taxation years beginning on or before March 18, 1993, the above quoted portion is replaced by "amounts in respect of financing".

It is our view that the interest expense on the reassessed additional Crown royalties incurred in the normal course of production of natural resources would be considered as interest in respect of a debt of the producer or as interest in respect of financing. Accordingly, we agree with you that in the calculation of resource allowance for the purposes of draft section 1210 of the Regulations, the interest expense on the reassessed additional Crown royalties incurred in the normal course of production of natural resources would not reduce the resource profits, provided that the Draft Regulations are enacted in the form substantially the same as stated above.

If you have any further queries, please contact the writer.

Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch