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 processing of tailings from a potash mine constitute the processing of ore from a mineral resource that is not beyond the prime metal stage or its equivalent.
Position: Yes, provided the tailings are not processed beyond the prime metal stage or equivalent.
Reasons: Although mine tailings are not a mineral resource as defined in the Act, mine tailings constitute ore as the word is defined in subsection 1206(1) of the Regulations. Since the tailings are ore from a mineral resource, and provided the tailings are not processed beyond the prime metal stage or its equivalent, mine tailings meet the requirement of paragraph 20(1)(v.1) of the Act as being in respect of a mineral resource.
April 17, 2001
XXXXXXXXXX Tax Services Office HEADQUARTERS
Verification and Enforcement Division Reorganizations and
Resources Division
David Shugar
957-2134
Attention: XXXXXXXXXX
Large File Auditor
2001-007109
Salt Sales - Resource Allowance
This is in reply to your correspondence of February 19, 2001 wherein you requested our opinion on whether a resource allowance can be claimed on the processing of potash mine tailings, specifically, whether the removal of water and dirt from the tailings constitutes the production and processing of ore from mineral resources to any stage that is not beyond the prime metal stage or its equivalent.
In the situation described in your letter, two unrelated companies, Aco and Bco are in the business of mining and milling potash. From the information you provided, it appears that you are satisfied that Aco and Bco are mining sylvite, a mineral resource, from which they produce potash. A salt based by-product is produced by the mining operation and is stored in the tailings area on the surface of the mine property. Saltco purchases the tailings from Aco and Bco in exchange for paying all royalties, production taxes, federal sales and excise taxes, provincial taxes, licenses, permits and registration fees to either the assessing authorities or as a reimbursement to the two companies. Saltco pays $XXXXXXXXXX to $XXXXXXXXXX per tonne to one of the companies, and does not pay the other company any amount for its tailings.
Paragraph 20(1)(v.1) of the Income Tax Act (the "Act") provides for a deduction of a resource allowance in computing income. Whether certain sources of income or deductions are included in computing a taxpayer's resource allowance depends upon an interpretation of the rules prescribed in Part XII of the Income Tax Regulations (the "Regulations"), and this generally involves making factual determinations.
In very general terms, a taxpayer must first compute its gross resource profits, which is defined in subsection 1204(1) of the Regulations. Gross resource profits includes income from the processing of ore from mineral resources. The gross resource profits amount is then modified in accordance with subsection 1204(1.1) of the Regulations, and the resulting amount is a taxpayer's resource profits, which is itself adjusted by subsection 1210(2) of the Regulations to become adjusted resource profits. Subsequently, the formula in subsection 1210(1) of the Regulations is applied to determine the resource allowance that the taxpayer will be able to deduct in computing its income.
Since May 22, 1986, it has been Rulings' position that, generally, income from the processing of mine tailings is entitled to a resource allowance pursuant to paragraph 20(1)(v.1) of the Act. We have accepted that although mine tailings are not a mineral resource as defined in the Act, mine tailings constitute ore as the word is defined in subsection 1206(1) of the Regulations. As the tailings are ore from a mineral resource, and provided the tailings are not processed beyond the prime metal stage or its equivalent, mine tailings meet the requirement of paragraph 20(1)(v.1) of the Act as being in respect of a mineral resource. The reasoning for our position follows.
Subsection 248(1) of the Act contains the following definition of mineral resource:
"mineral resource" means
(a) to (c) n/a,
(d) a mineral deposit in respect of which
(i) n/a,
(ii) the principal mineral extracted is ammonite, gemstone, calcium chloride, diamond, gypsum, halite, kaolin or sylvite; or
(iii) n/a.
The definition of deposit in The Shorter Oxford English Dictionary (3rd. ed.) includes the following:
"... something principal deposited, laid or thrown down; esp. matter precipitated from a fluid medium, or collected in one place by a natural process. In mining, an accumulation or ore, esp. of a somewhat casual character, as in pockets ..."
It is our view that a tailings accumulation is not a mineral resource as defined in the Act since a deposit in the context of a mineral resource is likely an accumulation by natural process, whereas a tailings accumulation is deposited through a man-made process.
In 1988, we opined that mine tailings may be ore from a mineral resource such that income from processing tailings may qualify for the resource allowance. In order to so qualify, the tailings must be ore within the definition found in subsection 1206(1) of the Regulations, and the tailings cannot be processed beyond the prime metal stage or its equivalent. Ore is defined in subsection 1206(1) of the Regulations and includes "ore from a mineral resource that has been processed to any stage that is prior to the prime metal stage or its equivalent." In the situation at hand, the mine tailings meet the definition of ore, because the tailings were originally from sylvite, a mineral resource, and have not been processed to the prime metal stage or its equivalent.
Paragraph 20(1)(v.1) of the Act permits a deduction of a resource allowance as determined under Regulation 1210 of the Regulations "...in respect of ... mineral resources in Canada." As you are aware, the words in respect of have been considered by the Supreme Court of Canada in Nowegijick v. M.N.R., 83 DTC 5041. At page 5045, Mr. Justice Dickson (as he then was) stated the following:
The words "in respect of" are, in my opinion, words of the widest possible scope. They import such meaning as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters.
Therefore, the processing of ore, which includes tailings, is "in respect of" a mineral resource within the meaning of paragraph 20(1)(v.1) of the Act. Provided a taxpayer otherwise meets the requirements of the Regulations, it is our view that paragraph 20(1)(v.1) of the Act applies to mine tailings. However, where the product from reprocessing tailings is not a mineral, as defined in subsection 248(1) of the Act, the income will not be included in gross resource profits under paragraph 1204(1)(b) of the Regulations, and, therefore, not be eligible for the resource allowance.
The taxpayer's representative submitted that Saltco would include its income in gross resource profits under clause 1204(1)(b)(ii)(A) of the Regulations, which refers to the "production and processing in Canada of ore, ..., from mineral resources operated by him ... ." In MNR v. Bethlehem Copper Corporation Ltd., 74 DTC 6502 (S.C.C.), Martland J. wrote for the court at page 6524 that "... the operation of a mine refers to the extraction of ore from the ore body. It does not include the processing of the ore after production." He reiterated Pigeon J.'s statement on behalf of the Federal Court of Appeal that "Mining itself is complete by the production and hoisting of the ore..." In this situation, Saltco does not operate the mineral resource (it is operated by Aco and Bco), therefore clause 1204(1)(b)(ii)(A) of the Regulations would not apply in this situation.
However, resource profits could be generated by a processor of tailings who had not operated the mineral resource, by virtue of clause 1204(1)(b)(iii)(A) of the Regulations, which refers to income from "the processing in Canada of ore, other than iron ore or tar sands ore, from mineral resources in Canada not operated by him to any stage that is not beyond the prime metal stage or equivalent."
Black's Law Dictionary, 6th Edition, defines "process" or "processing" as follows:
"A series of actions, motions or occurrences; progressive act or transaction; continuous operation; method, mode or operation, whereby a result or effect is produced; normal or actual course of procedure; regular proceeding, as, the process of vegetation or decomposition; a chemical process; processes of nature."
In our view, the removal of water and dirt from the ore from the tailings constitutes processing for purposes of clause 1204(1)(b)(iii)(A) of the Regulations.
It is a question of fact whether the product from processing the ore, sodium chloride, is a mineral that is not processed to any stage that is not beyond the prime metal stage or its equivalent. The phrase "prime metal stage or its equivalent" is not defined in the Act. The phrase was considered by the Federal Court of Appeal in an Excise Tax case, Her Majesty The Queen v. Canadian Pacific Limited and Canadian National Railways Company, and in an Income Tax case, Her Majesty The Queen v. Gulf Canada Resources Limited, 96 DTC 6065.
In the Canadian Pacific/Canadian National Railways case, Mahoney, J. made the following comments:
"The definition refers to the processing of ore, not the processing of metal. That seems to me to be the crux of the "first metal stage" concept. There is necessarily a point in the processing of a metal bearing ore to the ultimate state required by a user of the metal where what is being processed is no longer ore or concentrate or something else and is recognized by knowledgeable persons as metal. It has, at that point, reached the prime metal stage."
In the Gulf case, Pratte, J., quoting Mahoney, J.A. speaking for the Court, made the following comments at page 6071:
"In my view, the equivalent of the prime metal stage for mineral production is that point where the production processes have produced a marketable, saleable commodity which meets the specification of its consumers."
From the information provided, the tailings cannot be used by Saltco's customers until the water and dirt has been removed. Before being processed, the tailings are of no use, and are acquired at little or no cost to Saltco. However, we have not been provided with sufficient details of the processing to make a determination as to whether the stage of first marketable commodity at commercial purity has been reached. Accordingly, we are not expressing any opinion on whether the processed salt leaving Saltco's processing plant is at a stage that is not beyond the prime metal stage or its equivalent. However, for the purpose of our discussion, we assume that the processed salt is at a stage that is not beyond the prime metal stage or its equivalent.
In your opinion, the processing of the tailings pile is eligible for the manufacturing and processing credit under section 125.1 of the Act. However, the definition of manufacturing and processing in subsection 125.1(3) of the Act excludes the processing of ore (other than iron ore or tar sands ore) from a mineral resource located in Canada to any stage that is not beyond the prime metal stage or its equivalent. The prime metal stage is the line of demarcation between the mining and manufacturing industries. Prime metal is the raw material supplied by the mining industry to the manufacturing industry. In this situation, the resource profits determined under subsection 1204 of the Regulations would be deducted in computing Canadian manufacturing and processing profits under Part LII of the Regulations.
In addition, you are concerned that since processing tailings does not have the risks associated with a mining operation, Saltco would obtain a tax benefit intended for resource activities having an element of risk. However, since mine tailings are not treated as mineral resources, income from processing tailings would not qualify for special tax deductions such as Canadian Exploration Expense, Canadian Development Expense, flow through share financing, or accelerated capital cost allowances. Regarding Saltco's access to the resource allowance, the general purpose of the resource allowance is to compensate for non-deductibility of Crown charges, not to compensate for risks associated with mining. In this case, Saltco pays these charges, which the auditor is proposing to disallow under paragraph 18(1)(m) and section 80.2 of the Act.
In your correspondence you state that the taxpayer's representative has taken a position that Aco and Bco are each joint venture production partners of Saltco, and, as a result of this arrangement, Saltco is directly involved in the mining of salt. However, since you are satisfied that such a position is not supportable, we did not address that issue.
In conclusion, it is our view that, provided the processed salt is at a stage that is not beyond the prime metal stage or its equivalent, the processing of the mine tailings would be included in computing Saltco's resource profits by virtue of clause 1204(b)(iii)(A) of the Regulations, and Saltco would be entitled to claim the resource allowance under paragraph 20(1)(v.1) of the Act.
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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, 2001
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, 2001
Email this Content