21 January 2000 Internal T.I. 1999-0011317 - SAFE INCOME - ALBERTA ROYALTY TAX CREDIT

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 Alberta Royalty Tax Credit should be netted with Alberta Crown Royalty to determine one amount that should be deducted in the computation of safe income on hand.

Position: Yes

Reasons: See response for detailed analysis of the issues

			January 21, 2000

	Calgary Tax Services Office	Income Tax Rulings
G. A. Lawrence		 Directorate
	Manager, Tax Avoidance	Tim Kuss
(613) 957-2117
	Attention:  Michael Slaney, Auditor
			983310

Alberta Royalty Tax Credit - Impact on Safe Income

This is in reply to your memo regarding the above matter. We will not reiterate all of the background facts in your memo as we consider them generally understood.

You have asked us to reconsider our position regarding the appropriate treatment of the Alberta Royalty Tax Credit ("ARTC") in the computation of safe income and safe income on hand for purposes of subsection 55(2). Your office is recommending that the ARTC be netted with the Alberta Crown Royalty ("ACR") in determining a net deduction for purposes of computing safe income on hand.

We provide the following comments.

Analysis and Discussion

The matter has been dealt with most recently in a 1994 round table question for the Canadian Petroleum Tax Society. In that response, we maintained the position that the ARTC is equivalent to a government grant and that it is not included in a taxpayer's income under 12(1)(x) and does not reduce any of the taxpayer's resource pools. As the ARTC is not included in the corporation's income for tax purposes we concluded that it should not be included in determining a corporation's safe income or safe income on hand.

By virtue of the definition in paragraph 26(1)(c) of the Alberta Corporate Tax Act, ACR is either not a deductible expense by virtue of paragraph 18(1)(m) of the federal Act, or is included in income under 12(1)(o) of the federal Act, as the case may be. In a case where paragraph 18(1)(m) applies, we have taken the position that ACR, while not a deduction for purposes of the computation of income earned or realized, is an outlay or expense that reduces the safe income on hand that can contribute to the unrealized gain on the shares. In a case where paragraph 12(1)(o) applies, while ACR is an income inclusion in the computation of income earned or realized, it has been our view that it does not contribute to the gain on the shares and should be backed-out in the computation of safe income on hand.

We have now re-examined the issue and, as part of that review, have attempted to gain a better understanding of the nature and extent of the interrelationship or interconnection between the ACR that a taxpayer pays to the Province and the ARTC it receives from the Province.

In very general terms, it is our understanding that ACR is computed with reference to production. Provided a corporation has ACR in a taxation year, it is entitled to an ARTC equal to the "weighted average rate" for the year multiplied by the lesser of: (1) its "crown royalty shelter" for the year, and (2) its ACR for the year. We do not intend to go into the details of the various definitions and calculations relating to the ARTC. However, two things appear clear; (1) you will not be entitled to an ARTC for a taxation year unless you have ACR for the year, and (2) if you do have ACR for a taxation year you will be entitled to some amount of ARTC for the year.

The nature of the ARTC has been examined in at least three recent Alberta court cases. In United Canso Oil & Gas Ltd. v. Washoe Northern Inc. et al. (1991) 121 A.R. 1, Hutchinson J. stated

"The fact that the majority of oil and gas companies showed ARTC as a reduction in income tax in their financial statements may indicate their perception of the actual impact of such payment on their companies' financial affairs. It does not, however, dispel the reality that such payment is tied directly to provincial royalties paid, against which a credit can be claimed, regardless of whether income taxes are payable or not up to a maximum allowable limit and, in effect, represents a refund of Crown royalties or a reduction in Crown royalties."

This conclusion was approved and upheld by the Alberta Court of Appeal in Excel Energy Inc. v. The Queen (1997) 196 A.R. 67.

".... I agree with Hutchinson J., who there concluded that the Alberta royalty tax credit is best seen as a 'reduction or refund of' the Crown royalty." [Per Kerans J.A. at page 71 of the report.]

In Canadian Roxy Petroleum Ltd. v. The Queen, 98 D.T.C. 6313, Shannon J. of the Alberta Court of Queen's Bench stated:

"... After analyzing the expert evidence on the subject, Hutchinson J. concluded that the ARTC program was a reduction of royalties payable, not income tax related, notwithstanding that it is administered under the ACTA [Alberta Corporate Tax Act]..."

Later, in the same case, in reference to Hutchinson's conclusion, Shannon J. concludes:

"I see no reason to depart from this thorough and articulate conclusion."

Arguably, there are two ways (for safe income purposes) to view the interconnection of the ARTC and ACR. Consistent with the jurisprudence referred to above, the ARTC is, in substance, a reduction or refund of the royalties payable.

Alternatively, it is also possible to view the ARTC as simply a form of provincial assistance or grant that the Province has chosen to be administered through the ACR and ARTC programs (i.e., it is possible to view the ARTC program as simply the mechanism by which the Province is providing assistance and that the ARTC, for safe income purposes, should not necessarily be linked directly with ACR). Clearly, if the form of assistance was either unconditional or somehow not tied to ACR for the year, the amount of the assistance should not be netted with the ACR in the computation of safe income.

We would note that this jurisprudence supports our view that the ARTC is not a reduction to provincial taxes for purposes of computing a corporation's safe income on hand.

Recommendation

In light of the recent jurisprudence referred to above, it is our opinion that, for purposes of computing safe income on hand, the ARTC should be considered, in substance, a reduction or refund of the ACR. We therefore recommend that a taxpayer's ACR and ARTC for the year be netted to compute one amount that will be deducted in computing safe income on hand. As the ARTC and ACR are so interrelated and the Courts have expressed the view that ARTC represents a refund or reduction of the ACR, acceptance of this position should not affect our position regarding other non-taxable receipts not being included in the computation of safe income on hand.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch