2000 Ruling 1999-0012933 - Mine; Bituminous Sands

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: project; mine; bitumen; CSS; deposit

Position: one project, one mine, one deposit

Reasons: highly integrated extraction process;
also - dictionary definition of "project"; case law on new mine/old mine

XXXXXXXXXX
XXXXXXXXXX 								1999-001293
XXXXXXXXXX 								991596
										XXXXXXXXXX
Attention:	XXXXXXXXXX 						XXXXXXXXXX
	XXXXXXXXXX 

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above taxpayers. We also acknowledge receipt of the information provided in your letter dated XXXXXXXXXX.

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayers or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;

(iii) under objection by the taxpayers or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C 1985 (5th Supp.) c.1, as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "Area" means the Western Canada Basin;

(c) "Board" means the Energy Resources Conservation Board of Alberta;

(d) "CBCA" means the Canada Business Corporations Act;

(e) "depreciable property" has the meaning assigned by paragraph 13(21)(b);

(f) "GPCo" means XXXXXXXXXX;

(g) "Location" means "XXXXXXXXXX";

(h) "materials" means petroleum, natural gas and related hydrocarbons;

(i) "ParentCo" means XXXXXXXXXX;

(j) "PCo" means XXXXXXXXXX;

(k) "private corporation" has the meaning assigned by paragraph 89(1)(f);

(l) "Province" means the Province of Alberta;

(m) "Province EUB" means the Alberta Energy and Utilities Board;

(n) "PS" means XXXXXXXXXX;

(o) "public corporation" has the meaning assigned by paragraph 89(1)(g);

(p) "Regulations" means the Income Tax Regulations (Consolidated Regulations of Canada, c.945) as amended as at the date hereof;

(q) "Specific Area" means Athabasca;

(r) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1); and

(s) "taxable Canadian corporation" has the meaning assigned by paragraph 89(1)(i).

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

1. PS is a Province limited partnership which is carried on by its two partners, PCo and GPCo. PCo is a general and limited partner with a XXXXXXXXXX% interest in the partnership. GPCo is a general partner and holds the remaining XXXXXXXXXX% interest in the partnership. PS carries on the business of exploration for, and the development, production and processing of materials in the Area.

2. PCo is a taxable Canadian corporation governed by the CBCA. PCo is neither a public corporation nor a private corporation. ParentCo, a public corporation, owns all of the issued and outstanding shares of PCo. PCo and its subsidiaries carry on the business of exploration for, and the development, production and processing of, materials. PCo's income tax account number is XXXXXXXXXX.

3. GPCo is a taxable Canadian corporation governed by the CBCA. GPCo is neither a public corporation nor a private corporation. PCo owns all of the issued and outstanding shares of GPCo. GPCo carries on the business of exploration for, and the development, production and processing of, materials. GPCo's income tax account number is XXXXXXXXXX.

4. The Location Oil Sands operation, XXXXXXXXXX, is Canada's XXXXXXXXXX largest source of crude oil production. The Location leases cover about 780 square kilometers of oil sands. The oil-bearing sands, which are buried more than 400 metres below the surface, are not amenable to the surface mining techniques used to recover bitumen in the shallower sections of the Specific Area oil-sands deposits in northern Province.

5. In 1978, a predecessor of PS submitted an application for a large-scale development at Location. This project, XXXXXXXXXX, proposed to produce 25,400 m3/d of bitumen and to upgrade it into synthetic crude oil.

Following a hearing in early 1979, the Board, now known as the Province EUB, issued a report recommending approval of the proposed $XXXXXXXXXX billion megaproject. However, the megaproject was subsequently canceled as a result of a deterioration in the business environment.

6. A predecessor of PS then modified its approach to development at Location, proposing to undertake a series of smaller scale, phased developments rather than a single large-scale development. Under this new approach, the bitumen is blended with diluent (hydrocarbon condensates) to enable it to be transported to market by pipeline, rather than being upgraded to a synthetic quality crude at Location.

7. In 1983, a predecessor of PS received Province EUB approval to proceed with the construction of the first two phases of commercial development, known as the Location Production Project, on oil sands leased at Location. Additional approvals were received for:

Phases 3 and 4 in 1984,
Phases 5 and 6 in 1985,
Phases 7 through 10 in 1986,

Phases 11 through 13 in 1999.

8. The reservoir at Location is a thick accumulation of well-sorted sands occurring in ancient valleys in the Cretaceous Clearwater Formation. Because the sands were porous and in direct contact with one another, the oil flowed upward through them being transformed into bitumen. As a result, multiple pay zones make up a single Location - Clearwater pool or deposit.

9. Production is achieved through wells drilled from the surface. The production process used at Location is called cyclic steam-stimulation ("CSS"), whereby steam from central plants is carried through insulated pipelines and injected at high pressure down the wellbore. Thousands of closely spaced wells are connected on the surface to common steam and water treatment plants. Steam generators are optimized relative to the reservoir to be steamed and steam generators and associated water treatment facilities are located at three plant sites XXXXXXXXXX The steam is passed through the oil sands in a wave across the entire operational area. This heats the bitumen, reducing the viscosity and allowing it to flow. This is followed by a period of soaking and then the heated bitumen is pumped to the surface, processed at central plants and blended with lighter hydrocarbons so that it can be shipped by pipeline.

10. Due to subsurface and surface interactions in the recovery process and between processing and production facilities and wells, PS's Location Development operates as a single physical entity. The recovery process from the reservoir using CSS is a highly integrated process, and the production and surface facilities operate as a single integrated entity. Within the reservoir, careful management of energy transfer between adjacent groups of wells is essential for the economic success of the process. There is frequently direct communication of fluids between adjacent groups of wells. Controlling the surface flow of steam and fluids between the various plant sites enables the optimization of water usage. This ensures the best usage of the fluid processing facilities across the overall operation. The water management, separation of the bitumen from the water, and the addition of diluent to the bitumen is undertaken on an integrated basis between the three plants, with most of the control functions located at the XXXXXXXXXX plant.

11. The personnel running the various plants operate as teams reporting to a single operations manager. There is a high degree of integration in the provision of services with a single engineering manager.

12. A phased commercial production project began in XXXXXXXXXX. At present, PS is operating Phases 1 through 10. Phases 1, 2, 5 and 6 form the XXXXXXXXXX development area, and Phases 3 and 4 and 7-10 make up the XXXXXXXXXX development area. Location Phases 1 through 10 were expected to produce on average in excess of 21,800 cubic metres of bitumen per day in 1998.

13. The bitumen recovered at the Location leases has an average density of less than 12 degrees API and a viscosity of greater than 10,000 centipoise measured at atmospheric pressure, at a temperature of 15.6 degrees Celsius and free of solution gas. The Location leases contain a deposit of "bituminous sands" as defined in subsection 248(1) of the Act.

PROPOSED TRANSACTIONS

14. PS is advancing development work on Phases 11 through 13 (the XXXXXXXXXX development area) for start-up by about 2003. The Location Phases 11 through 13 expansion is expected to increase bitumen production by about 4,000 cubic metres per day. PS will incur approximately $XXXXXXXXXX million to develop Location Phases 11 through 13.

15. The development costs of PS will include expenses to drill and equip approximately XXXXXXXXXX wells and related depreciable property of PS consisting mainly of:

a) Gas-powered turbines that generate electricity and heat for steam production;

b) Heat recovery steam generators that produce the steam for injection into the formation;

c) Water processing equipment that is used to treat the water that is produced with the bitumen to allow the water to be re-used to produce the steam;

d) Pumps, tanks, pipelines and flowlines for use in injecting the steam and transporting and storing the produced bitumen and water;

e) Roads and holding ponds used in the production activities; and

f) Buildings to house the above-mentioned equipment, equipment maintenance area and the administrative office.

PURPOSE OF THE PROPOSED TRANSACTIONS

16. The purpose of the proposed transactions is to expand the Location Project in Phases 11 through 13 and to include a 170-megawatt electrical co-generation plant that would supply all of the electricity needs of the entire PS Location operation. The heat from the co-generation plant would be used to produce the steam that is injected into the oil-sand formation in Phases 11 through 13.

RULING GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is as set forth below.

For the purposes of paragraphs 1100(1)(w) to (ya), subsections 1101(4a) to (4d) and 1102(8) and (9), section 1107 and Classes 12, 28 and 41 of Schedule II, all of the wells of PS for the extraction of material from the deposit of bituminous sands included in the Location Project Phases 1 through 13 will constitute one project, and will be deemed to be one mine of PS pursuant to paragraph 1104(7)(c) of the Regulations.

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and is binding on the Canada Customs and Revenue Agency (the "CCRA") provided that orders for fabrication on long-lead time equipment are placed and site work on Phases 11 to 13 commences by XXXXXXXXXX.

The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the ruling provided herein. In addition, nothing should be construed as implying that the CCRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.

Yours truly,

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