3 February 2000 External T.I. 1999-0011835 - Access to Successored Resource Pools

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 certain amounts received as a royalty or as proceeds of disposition yield access to "successored" resource expenditures.

Position: Potentially, however, appropriate treatment depends upon the circumstances.

Reasons: Must be determined from the application of the provisions of the Act to the facts and circumstances of a particular situation.

						991067
XXXXXXXXXX 								A.A. Cameron
(613) 347-1361
Attention:  XXXXXXXXXX 

February 3, 2000

Dear Sirs:

Re: Successor Resource Expenditures

We are writing in response to your request for a technical interpretation in a situation involving a corporation, which is a "taxable Canadian corporation" and a "principal business corporation" for purposes of the Income Tax Act (the "Act"), and working interests in two separate oil and gas leases, each of which is a "Canadian resource property" of the corporation for purposes of the Act.

The hypothetical situation described is one where the corporation incurred "Canadian exploration expense", "Canadian development expense" and "Canadian oil and gas property expense" for purposes of the Act in respect of the above two working interests prior to control of the corporation being acquired by a person such that the provisions of subsection 66.7(10) of the Act applied to those expenditures (the "Successor Resource Expenditures"). In the hypothetical situation described, it is also indicated that subsequent to the application of subsection 66.7(10) of the Act, the corporation sells:

i) a gross overriding royalty (the "Sold Royalty") newly created out of its working interest in one of the above oil and gas leases (with ownership of the encumbered working interest remaining with the corporation); and

ii) its working interest (the "Sold Working Interest") in the other oil and gas lease referred to above (with the corporation retaining a gross overriding royalty in respect thereof; the "Retained Royalty").

You have requested our confirmation, essentially, that the "sale proceeds" from the Sold Royalty and the Sold Working Interest, as well as the "production income" from the Retained Royalty "may be offset by", and to the extent of, the Successor Resource Expenditures.

Our Comments

We are unable to provide the above confirmation as such a request could only be considered in the context of a request for an advance income tax ruling with respect to proposed transactions involving specific taxpayers. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with Information Circular 70-6R3 dated December 30, 1996 ("IC 70-6R3"). Nevertheless, we can provide you with the following general comments with respect to subsections 66.7(3), (4) and (5) of the Act which may be of some assistance.

Pursuant to the provisions of subsection 66.7(18) of the Act, the definition of "production" found in subsection 66(15) thereof will apply for purposes of section 66.7 of the Act. As such, paragraph (f) of the above definition is applicable in interpreting the word "production" in clauses 66.7(3)(b)(i)(C), 66.7(4)(b)(i)(B) and 66.7(5)(b)(i)(B) of the Act. Therefore, in our opinion, a "successor" corporation's income that may reasonably be regarded as attributable to "production" from a particular Canadian resource property for purposes of determining the deductions which may be available to the successor under subsections 66.7(3), (4) and (5) of the Act, would include income that is received as a royalty computed by reference to the amount or value of the production of petroleum, natural gas or related hydrocarbons from that property.

The appropriate treatment under the Act of proceeds of disposition which become receivable by a corporation in respect of a particular Canadian resource property, with regard to which the corporation is a successor for purposes of subsections 66.7(3), (4) or (5), will depend on the circumstances of the relevant situation. However, in our opinion, where such property is described in paragraph (a) of the definition "Canadian resource property" in subsection 66(15) of the Act, the above proceeds of disposition arise from the sale of all or an interest in that property in circumstances to which the provisions of subsection 66.7(14) of the Act do not have application and the successor corporation has included such proceeds of disposition in computing an amount determined under paragraph (a) of the description of F in the definition "cumulative Canadian oil and gas property expense" (CCOGPE) in subsection 66.4(5) of the Act and would (immediately before the time the above proceeds of disposition become receivable by it) have a balance determined under paragraph 66.7(5)(a) and paragraph 66.7(4)(a) of the Act in respect of the acquisition of that property, generally, in determining the amounts under subparagraphs (b)(ii) and (c)(ii) of the description of F in the definition of CCOGPE, the provisions of neither of clause 66.7(5)(a)(ii)(B) nor clause 66.7(4)(a)(iii)(C) of the Act would be considered to exclude such proceeds of disposition from the determination of an amount under subparagraph 66.7(5)(a)(ii) or subparagraph 66.7(4)(a)(iii), respectively, of the Act. In addition, it is also our opinion that, in a situation where clause 66.7(3)(b)(i)(A) of the Act is relevant (and the exceptions therein with regard to inclusions for a preceding taxation year are not relevant), the proceeds of disposition of property described in the preceding sentence would be encompassed by that clause.

In accordance with paragraph 21 of IC 70-6R3, the comments contained herein are not income tax rulings and are not binding on the Canada Customs and Revenue Agency.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch