11 March 1997 Internal T.I. 9701087 - INTEREST ON REASSESSED ADDITIONAL MINING TAXES

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.

Principal Issues:

Whether the interest charge on the reassessed additional Manitoba and Ontario mining taxes ("MMT" and "OMT") incurred and paid by XXXXXXXXXX in its XXXXXXXXXX taxation years, is deductible in computing XXXXXXXXXX income.

Position:

Such interest charge is not deductible in computing XXXXXXXXXX income.

Reasons:

It is our understanding that both MMT and OMT are generally not classified as deductible expenses in computing profits (i.e., earning before income taxes) in accordance with well accepted principles of business (or accounting) practice. Both MMT and OMT are incurred only after profits have been earned and calculated in accordance with the respective provincial legislation and are not incurred in the course of earning such profits nor incurred for the purpose of earning such profits. Similarly, interest on reassessed MMT and OMT is also incurred only after profits have been earned and calculated in accordance with the respective provincial legislation and are not incurred in the course of earning such profits nor incurred for the purpose of earning such profits. Accordingly, in light of jurisprudence, it is our view that both MMT and OMT are income or profits taxes and are not deductible in computing income pursuant to subsection 9(1) and paragraph 18(1)(a) of the Act. It is also our view that interest on reassessed MMT and OMT is not deductible in computing income pursuant to subsection 9(1) and paragraph 18(1)(a) of the Act. See the files #910782 dated January 31, 1992, #923189 dated June 15, 1993, and #943091 dated May 5, 1995.

It is really not relevant that paragraph 18(1)(m) arguably applies to MMT and OMT and that there is no reference to interest in paragraph 18(1)(m) of the Act because both MMT and OMT and interest thereon are not deductible in computing income by virtue of subsection 9(1) and paragraph 18(1)(a) of the Act even though there is no reference to paragraph 18(1)(m) of the Act. The case at hand can be differentiated from the situation of interest on reassessed additional production-based Crown royalties in that they are profits-based and are incurred after profits have been earned. See the files #960044 dated January 18, 1996 and #910676 dated June 26, 1991.

		March 11, 1997

	Toronto Centre Tax Services Office	Resource Industries
Ms. Cathie Figueira	  Section
	Acting Assistant Director 	Peter Lee
	Verification & Enforcement	(613) 957-8977

	Attention:   Ms. Carme Lau
	             Large Files Section
		7-970108

XXXXXXXXXX
Interest on Reassessed Manitoba and Ontario Mining Taxes

This is in reply to your memorandum of January 13, 1997 wherein you requested our opinion in respect of the deductibility of the interest charge on the reassessed additional Manitoba and Ontario mining taxes incurred and paid by XXXXXXXXXX.

Our understanding of the facts is as follows.

Facts

XXXXXXXXXX Request for Deduction

1.You recently received a request from XXXXXXXXXX to allow as a deduction in computing its income for the XXXXXXXXXX taxation years, the interest charge paid by XXXXXXXXXX on the reassessed additional Ontario mining tax ("OMT") and Manitoba mining tax ("MMT"). The amount of deductions requested for the respective years are as follows:

Interest Charge on Mining Taxes

Ontario Manitoba

XXXXXXXXXX

The XXXXXXXXXX Ontario amount is in respect of a reassessment of OMT for the taxation years of XXXXXXXXXX. The XXXXXXXXXX Manitoba amount is in respect of a reassessment of MMT for the taxation years of XXXXXXXXXX. The XXXXXXXXXX Manitoba amount is in respect of a reassessment of MMT for the taxation years from XXXXXXXXXX.

2.XXXXXXXXXX request is solely based on a published technical interpretation memorandum (#9600446) issued by Rulings on January 18, 1996 (the "Published Memo"). The Published Memo addresses the issues of whether interest on Crown royalties would be deductible in computing income for the purposes of section 9 of the Income Tax Act (Canada) (the "Act") and whether such interest would grind resource profits in calculating resource allowance for the purposes of paragraph 20(1)(v.1) of the Act and draft section 1210 of the Income Tax Regulations (Canada) (the "Regulations").

3.The Published Memo states as follows:

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).

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 March 18, 1993 draft Regulations are enacted in the form substantially the same as stated above.

4.Audit Directorate has recently revised its assessing position in respect of interest on under-remitted and reassessed provincial royalties that are non-deductible in accordance with paragraphs 12(1)(o) and 18(1)(m) of the Act. The revised assessing position is outlined in a memorandum dated October 2, 1996 issued to all Tax Services Offices by Audit Directorate (the "All TSO's Memo"). Previously, interest charges on Crown royalties were treated as non-deductible expenses. Pursuant to this revised assessing position, such interest charges are deductible under subsection 9(1) of the Act.

5.XXXXXXXXXX takes the position that similar to Crown royalties, mining taxes paid to the provinces of Ontario and Manitoba are prohibited from deduction from business profits by virtue of paragraph 18(1)(m) of the Act. Consequently, XXXXXXXXXX is of the opinion that the position in the Published Memo in respect of interest on reassessed additional Crown royalties should be extended to interest on mining taxes paid to the provinces of Ontario and Manitoba.

Ontario Mining Tax

6.The issue of whether OMT is an "income or profits" tax was previously examined by Rulings (see the memoranda #923189 dated June 15, 1993 and #943091 dated May 5, 1995). XXXXXXXXXX OMT is an income or profits tax and is not deductible in computing income for the purposes of section 9 and paragraph 18(1)(a) of the Act. Accordingly, OMT could only be deductible in computing income by virtue of paragraph 20(1)(v) of the Act to the extent as prescribed in section 3900 of the Regulations.

Manitoba Mining Tax

7.The issue of whether MMT is an income or profits tax has not been previously examined by Rulings and Justice. The Mining Tax Act (Manitoba) (the "MMT Act") embraces the taxation of all mining in Manitoba, whether the mining takes place on Crown land or freehold land. Pursuant to subsection 13(1) of the MMT Act, subject to the deduction for new investment credit, every operator of a mineral processing establishment in Manitoba is required, for each fiscal year in which the operator has a profit, to pay MMT equal to 20% of the operator's profits in that fiscal year. Pursuant to subsection 13(2) of the MMT Act, an operator can deduct in computing the operator's MMT payable an amount equal to the lesser of: (A) his new investment credit as of the last day of that fiscal year (calculated in accordance with Formula 1 set out in the Schedule to the MMT Act); and (B) 50% of the tax calculated under subsection 13(1) of the MMT Act.

8.Section 4 of the MMT Act stipulates that the profits of an operator in a fiscal year shall be calculated in accordance with Formula 2 set out in the Schedule to the MMT Act. Under Formula 2, the profits on which MMT is calculated equal R minus E. R generally includes the total of:

(a)the operator's revenue in the year from the sale of mineral products mined in Manitoba whether or not partially processed outside Manitoba;

(b)revenue from custom processing in Manitoba of mineral products originating from ore mined in Manitoba;

(c)revenue from custom mining; and

(d)refunds from the Mine Rehabilitation Fund established by the Mines and Minerals Act (Manitoba).

E generally includes the total of all permitted expenses, payments and allowances, specified under sections 7 to 12 of the MMT Act, that are related to the mining, processing and sale of output mined in Manitoba. These permitted deductions and allowances include the following:

(e) operating expenses

(i) costs of transporting output,

(ii) salaries,

(iii) operating costs of mining, milling, smelting, refining, recrystallizing, or otherwise beneficiating the output in Manitoba,

(iv) insurance, mint and marketing costs directly relating to marketing the output,

(v) municipal taxes,

(vi) costs of research designed to reduce the cost of output or to recover additional output from the mineral processing establishment of the operator,

(vii) costs of purchase of mineral products mined in Manitoba for further processing or for resale, and

(viii)any other expenses attributable to the mining, processing and sale of output;

(f) depreciation allowance: a maximum annual depreciation allowance (on a declining balance basis) of 20% of the undepreciated balance of all depreciable assets in Manitoba at the end of the fiscal year;

(g) exploration expenses incurred for the exploration for new mineral occurrences in Manitoba, excluding the costs of resource properties, preproduction expenses and costs to acquire depreciable assets plus an additional amount as permitted by the legislation;

(h) rehabilitation expenses incurred and monies paid and credited to the Mine Rehabilitation Fund; and

(i) processing allowance equal to the lesser of: (A) 10% of the costs of assets solely used for in-province processing and out-of-province processing of minerals mined in Manitoba, and (B) 65% of profits computed before deducting the processing allowance.

The following deductions are specifically disallowed in computing the profits subject to MMT:

(j) capital invested;

(k) interest or dividends;

(l) depletion of the ore or mineral;

(m) payments for the right to mine or an option to the right to mine; and

(n) portion of an expenditure for which monies have been received in the form of a grant, subsidy or other assistance.

Furthermore, losses incurred by the operator are not recognized in computing the profits subject to the MMT.

9.Pursuant to section 16 of the MMT Act, any debt of an operator under the MMT Act, including the debt resulting from a reassessment, and deficiency of instalment of MMT by the operator, bear interest.

Your Views

10.It is your view that MMT is an income or profits tax and is not deductible in computing business profits for the purposes of subsection 9(1) of the Act. It is also your view that since OMT and MMT are not expenses incurred to earn business profits, interest charges related to these mining taxes would also be non-deductible for the purposes of subsection 9(1) of the Act.

Your Request

11.You have requested our opinion on whether the interest charge on the reassessed additional OMT and MMT paid by XXXXXXXXXX in its XXXXXXXXXX taxation years is deductible in computing XXXXXXXXXX income in the respective years for the purposes of section 9 of the Act.

12.You have also requested our views on the following questions:

(a) Is the phrase "Crown royalties incurred in the normal course of production of natural resources" in the Published Memo intended to refer only to Crown royalties paid in respect of the production of petroleum and natural gas?

(b) Does Revenue Canada only consider the method of computation for a mining tax in determining if the tax is an income or profits-based tax or a Crown royalty incurred in the normal course of producing income from a natural resource?

(c) Where a Crown charge such as the Alberta metallic minerals royalty or the B.C. mining tax is computed on different basis at various stages, would Revenue Canada characterize all or part of the Crown charge as a profit tax or a royalty incurred in the normal course of production of natural resources, depending on the method of calculation?

Our Comments

13.We agree with your view that MMT is an income or profits tax and is not deductible in computing business profits for the purposes of subsection 9(1) of the Act. We also agree with your view that interest charges related to OMT and MMT are not deductible for the purposes of subsection 9(1) of the Act. Furthermore, it is also our view that paragraph 18(1)(a) of the Act is applicable to disallow the deduction of MMT and OMT and interest charges related thereto in computing income of XXXXXXXXXX. Our rationale is provided in the following paragraphs.

14.In the case of Symes, 94 DTC 6001 (SCC), the majority of the Court commented at page 6009 on what would constitute profit for the purposes of the Act:

... by virtue of s. 9(1), a taxpayer's income from business is stated to be the taxpayer's profit therefrom... "profit" being nowhere defined in the Act... s. 18(1)(a) provides that in computing business income, no deduction shall be made for an expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income... the "profit" concept in s. 9(1) is inherently a net concept which presupposes business expense deductions. It is now generally accepted that it is s. 9(1) which authorizes the deduction of business expenses; the provisions of s. 18(1) are limiting provisions only. See R. v. MerBan Capital Corp., 89 DTC 5404 (FCA).

... the determination of profit under s. 9(1) is a question of law: Neonex International Ltd. v. The Queen, (1978) C.T.C. 485 (FCA).

... it becomes immediately apparent that the well accepted principles of business practice encompassed by s. 9(1) would generally operate to prohibit the deduction of expenses which lack an income earning purpose... just as much as ss. 18(1)(a)... operate expressly to prohibit such deductions.

15.The Canadian jurisprudence (see the cases of First Pioneer Petroleums Ltd., 74 DTC 6109 (FCTD), Clinton W. Roenisch, (1931) 1 DTC 199 (Ex. Ct.), Quemont Mining Corp. Ltd. et al., 66 DTC 5376 (Ex. Ct.), and Nickel Rim Mines Ltd. v. Attorney General for Ontario, (1966) 1 O.R. 345 (CA-Ont.)) supports the view that by the very nature of provincial income taxes or Quebec or Ontario mining taxes, such taxes are incurred only after profits have been earned and calculated in accordance with the respective provincial legislation and are not incurred in the course of earning such profits, notwithstanding the fact that the profit amounts calculated under the applicable provincial legislation may not be an approximation of profits of the companies. The Canadian and British jurisprudence (see the cases of Ho Shuk Yuen Lai, 80 DTC 1044 (TRB), and The London County Council, (1901) A.C. 26 (HL)) also support the view that a tax on annual value of a property (i.e., the levying of tax on a notional basis) was an income tax even if such value might not be equal to or might not be an approximation of the actual rental income. Furthermore, if any mining tax was deductible in computing income pursuant to section 9 of the Act and was not restricted by paragraph 18(1)(a) of the Act, then paragraph 20(1)(v) of the Act would be redundant. In the case of Rio Algom Mines Ltd., 70 DTC 6046 (SCC), argument by all parties proceeded on the basis that OMT was a tax on income for the purposes of former paragraph 11(1)(p) (now paragraph 20(1)(v)) of the Act.

16.Although Canadian and British jurisprudence referred to in 14 and 15 above is more relevant in determining the issue of whether a mining tax is an income or profits tax for the purposes of the Act, the U.S. Tax Court decided in September 1996 in the case of Texasgulf, Inc. and subsidiaries, 107 TC No. 5, that OMT paid by Texasgulf had the predominant character of "income tax in the U.S. sense" for the purpose of calculating U.S. foreign tax credit pursuant to section 1.901-2 of the Income Tax Regulations (U.S.). The U.S. Tax Court also decided that the pre-regulation case law should not be relied on because the regulations provided objective and quantitative standards not found in prior law.

17.It is our understanding that both MMT and OMT are generally not classified as deductible expenses in computing profits (i.e., earning before income taxes) in accordance with well accepted principles of business (or accounting) practice. Both MMT and OMT are incurred only after profits have been earned and calculated in accordance with the respective provincial legislation and are not incurred in the course of earning such profits nor incurred for the purpose of earning such profits. Similarly, interest on reassessed MMT and OMT is also incurred only after profits have been earned and calculated in accordance with the respective provincial legislation and are not incurred in the course of earning such profits nor incurred for the purpose of earning such profits. Accordingly, in light of the above-noted jurisprudence, it is our view that both MMT and OMT are income or profits taxes and are not deductible in computing income pursuant to subsection 9(1) and paragraph 18(1)(a) of the Act. It is also our view that interest on reassessed MMT and OMT is not deductible in computing income pursuant to subsection 9(1) and paragraph 18(1)(a) of the Act. (See also our memorandum dated January 31, 1992 (#910782) in respect of the deductibility of interest on additional assessed taxes on profits from a gravel pit operation.)

It is really not relevant that paragraph 18(1)(m) arguably applies to MMT and OMT and that there is no reference to interest in paragraph 18(1)(m) of the Act because both MMT and OMT and interest thereon are not deductible in computing income by virtue of subsection 9(1) and paragraph 18(1)(a) of the Act even though there is no reference to paragraph 18(1)(m) of the Act as discussed in the above. The case at hand can be differentiated from the situation of interest on reassessed additional Crown royalties as further explained in 19 below. Accordingly, we do not agree with XXXXXXXXXX that the Department's revised assessing position referred to in 3 and 4 above in respect of interest on reassessed additional Crown royalties should be extended to interest on MMT and OMT as suggested by XXXXXXXXXX in 5 above.

18.In respect of 12(c) above, further to the recent telephone conversations (Lau/Lee) and (Scott/Lee), it has been agreed that we do not have to address it until further details and submissions in respect of the Alberta metallic minerals royalty or the B.C. mining tax are provided to us by Mr. Merv Scott, the Department's mining industry specialist.

19.In respect of 12(a) above, we confirm that the expression "Crown royalties incurred in the normal course of production of natural resources" in the Published Memo refers only to production-based Crown royalties paid in respect of the production of petroleum and natural gas because this is the essential fact upon which we expressed our opinion in our first memorandum on this issue dated June 26, 1991 (#910676). In such case, the Crown royalties incurred by a taxpayer in respect of the production of petroleum and natural gas are production-based royalties. Such production-based Crown royalties can be differentiated from MMT and OMT in that they are not profits-based. The production-based Crown royalties would generally be deductible in computing income of the taxpayer in accordance with well accepted principle of business (or accounting) practices pursuant to section 9 and would not be restricted by virtue of paragraph 18(1)(a) of the Act, provided that no reference is made to paragraph 18(1)(m) of the Act. In the Budget Speech of November 18, 1974, the then Minister of Finance said:

I acknowledge that royalties in respect of property rights have traditionally been deductible as a business expense.

This is different from MMT and OMT which are not deductible in computing income by virtue of subsection 9(1) and paragraph 18(1)(a) of the Act even though there is no reference to paragraph 18(1)(m) of the Act as discussed in 17 above.

Without any reference to interest in paragraph 18(1)(m) of the Act, it is arguable that interest on reassessed additional production-based Crown royalties would also generally be deductible in computing income of the taxpayer pursuant to section 9 and would not be restricted by virtue of paragraph 18(1)(a) of the Act. This position is consistent with the Department's position on interest expense on accounts payable as stated in Q.4 in the 1992 Corporate Management Tax Conference.

One might argue that interest on production-based Crown royalties in respect of oil and gas production and interest on profits-based mining taxes should not be treated differently for income tax purposes. Please note that in the Notice of Ways and Means Motion dated December 5, 1996, the Department of Finance has proposed to amend paragraph 18(1)(m) of the Act to include "an amount... in respect of the late payment or non-payment of any such amount", applicable to taxation years that begin after 1996. Accordingly, interest on production-based Crown royalties in respect of oil and gas production would become non-deductible, same as interest on profits-based mining taxes. As a result, the deduction of the Crown-royalty interest would be disallowed by virtue of paragraph 18(1)(m) of the Act but the deduction of the mining-tax interest is disallowed by virtue of subsection 9(1) and paragraph 18(1)(a) of the Act.

20.In respect of 12(b) above, it is always a question of fact and law as to whether a mining tax would be considered an income or profits-based tax. The method of computation of the tax is relevant in such determination, but it is not the only factor to be considered.

21.Further to our discussion in 17 above, we note that there is no reference to interest on mining tax in paragraph 20(1)(v) of the Act and section 3900 of the Regulations. If it were intended to allow interest on mining tax as a deduction in computing income under these provisions, it should be clearly stated as such, similar to subsection 80(2) of the Act in which interest payable is deemed to be an obligation issued by the debtor or similar to the proposed amendment to paragraph 18(1)(m) of the Act referred to in 19 above.

We hope that the above comments are helpful to you. If you have any further queries, please contact the writer.

Acting Chief
Resource Industries Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretation Directorate
Policy and Legislation Branch

c.c. Merv Scott, Mining Industry Specialist

Richard Cloutier, Mining Industry Specialist