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: (a) Whether a pipeline transporting the mixture of dehydrated and compressed natural gas and natural gas liquids to a natural gas processing plant (the second plant) for further processing would be considered as "gas or oil well equipment" within the meaning of the expression in subsection 1104(2) of the Regulations. (b) Whether the company's "gross resource profits" within the meaning of the expression in subsection 1204(1) of the Regulations would be determined by computing its income from operations up to and including the processing of the natural gas and natural gas liquids at the second plant.
Position: (a) Yes (b) Yes
Reasons: (a) Considering the ordinary meaning of the term "gas", it is our view that the pipeline may be considered as gas or oil well equipment by virtue of paragraph (b) of the definition of the expression under subsection 1104(2) of the Regulations. We note that in order to qualify as gas or oil well equipment, the pipeline cannot be used for purposes other than transmitting gas to a natural gas processing plant (e.g., shipping marketable natural gas to market).
(b) By analogy to the case of Texaco Exploration Company, it is our view that the operations of the company up to the inlet separator of the second plant may be considered as production of natural gas and related hydrocarbons for the purpose of subparagraph 1204(1)(b)(i) of the Regulations. By virtue of the definition of the expression "Canadian field processing" in subsection 248(1) of the Act, it is our view that the activities of the company in operating the second plant may be considered as Canadian field processing for the purpose of subparagraph 1204(1)(b)(vi) of the Regulations. As a result, the company's income from the operations up to and including the processing of the natural gas and natural gas liquids at the second plant may be considered as gross resource profits for the purpose of subsection 1204(1) of the Regulations, provided that subsection 1204(3) of the Regulations do not apply to the company.
2000-003130
XXXXXXXXXX Peter Lee
(613) 957-8977
Attention: XXXXXXXXXX
August 16, 2000
Dear Sir:
Re: Gross Resource Profits
Gas or Oil Well Equipment
Further to our meeting of June 22, 2000 and your letter of August 1, 2000 providing additional information, this is in reply to your facsimile of June 12, 2000, wherein you requested a technical interpretation regarding the subject matter in a situation involving transporting, transmitting and processing natural gas and natural gas liquids.
The particular circumstances in your facsimile on which you have asked for our views appears to be a factual situation involving specific taxpayers. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve specific taxpayers and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.
Hypothetical Situation
1. A mixture of natural gas, natural gas liquids and associated water (all in gaseous state in the reservoir), is produced by A Co. from its oil and gas properties. This mixture is shipped through a pipeline for a distance of more than 100 kilometers to a dehydration and compression plant located outside of the gas or oil field. After the initial processing at this plant, the mixture of dehydrated and compressed natural gas and natural gas liquids is then shipped through another pipeline for a distance of more than 100 kilometers to a natural gas processing plant which is also located outside of the gas or oil field. In this second plant, the natural gas liquids are separated from the mixture. However, there is no recovery of ethane. The resulting marketable natural gas will meet the pipeline shipping specifications of any common carrier in Canada (i.e., the natural gas liquids must be removed under these specifications).
Issues
2. The issues are: (a) whether the second pipeline transporting the mixture of dehydrated and compressed natural gas and natural gas liquids would be considered as "gas or oil well equipment" within the meaning of the expression in subsection 1104(2) of the Income Tax Regulations (the "Regulations"); and (b) whether A Co's "gross resource profits" within the meaning of the expression in subsection 1204(1) of the Regulations would be determined by computing the income from operations up to and including the processing of the natural gas and natural gas liquids at the second plant.
Legislation
3. The expression "gas or oil well equipment" is defined in subsection 1104(2) of the Regulations as follows:
... includes
(a) equipment, structures and pipelines, other than a well casing, acquired to be used in a gas or oil field in the production therefrom of natural gas or crude oil, and
(b) a pipeline acquired to be used solely for transmitting gas to a natural gas processing plant,
but does not include
(c) equipment or structures acquired for the refining of oil or the processing of natural gas including the separation therefrom of liquid hydrocarbons, sulphur or other joint products or by-products, or
(d) a pipeline for removal or for collection for immediate removal of natural gas or crude oil from a gas or oil field except a pipeline referred to in paragraph (b)...
4. Pursuant to paragraph 1204(1)(b) of the Regulations, "gross resource profits" of a taxpayer include the amount, if any, of the aggregate of his incomes from
(i) the production of petroleum, natural gas, related hydrocarbons or sulphur from (A) oil or gas wells in Canada operated by the taxpayer, or (B) natural accumulations (other than mineral resources) of petroleum or natural gas in Canada operated by the taxpayer...
(vi) Canadian field processing...
5. Pursuant to subsection 1204(3) of the Regulations, a taxpayer's income or loss from a source described in paragraph (1)(b) does not include
(a) any income or loss derived from transporting, transmitting or processing (other than processing described in... or subparagraph (1)(b)... (vi)) petroleum, natural gas or related hydrocarbons or sulphur from a natural accumulation of petroleum or natural gas...
(c) any income or loss that can reasonably be attributable to a service rendered by the taxpayer (other than processing described in subparagraph (1)(b)... (vi)...)
6. The term "gas" is defined in the Manual of Oil and Gas Terms (8th ed.) as follows:
Any fluid, either combustible or non-combustible, which is produced in a natural state from the earth and which maintains a gaseous or rarefied state at ordinary temperature and pressure conditions. In the oil and gas industries, it means natural gas.
7. Considering the above-noted definition of "gas", it is our view that the second pipeline may be considered as gas or oil well equipment by virtue of paragraph (b) of the definition of the expression under subsection 1104(2) of the Regulations. A determination can be made once the details of the actual proposed pipeline become available. We note also that in order to qualify as gas or oil well equipment, the pipeline cannot be used for purposes other than transmitting gas to a natural gas processing plant (e.g., shipping marketable natural gas to market).
8. By analogy to the case of Texaco Exploration Company, 75 DTC 5288 (FCTD), it is our view that the operations of A Co. up to the inlet separator of the second plant may be considered as production of natural gas and related hydrocarbons for the purpose of subparagraph 1204(1)(b)(i) of the Regulations. By virtue of the definition of the expression "Canadian field processing" in subsection 248(1) of the Income Tax Act (the "Act"), it is our view that the activities of A Co. in operating the second plant may be considered as Canadian field processing for the purpose of subparagraph 1204(1)(b)(vi) of the Regulations. As a result, A Co.'s income from the operations up to and including the processing of the natural gas and natural gas liquids at the second plant may be considered as gross resource profits for the purpose of subsection 1204(1) of the Regulations, provided that subsection 1204(3) of the Regulations do not apply to A Co. These determinations can be made once the details of the actual proposed activities become available.
We hope that our comments are helpful to you. These are only our general views on the matter and do not constitute an advance income tax ruling and accordingly they are not binding on the Canada Customs and Revenue Agency in accordance with paragraph 22 of Information Circular 70-6R3 as amended.
Yours truly,
John Chan, CA
Manager
Resource Industries Section
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
??
- 5 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2000
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2000