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) Are there any guidelines for determining whether certain wells constitute one in-situ project for the purposes of subsection 1104(7) of the Regulations? (b) Could there be more than one deposit involved in an in-situ project? (c) How would the viscosity or density of hydrocarbons be determined under subsection 1107(1) of the Regulations?
Position: (a) No (b) No (c) "Dead Oil" Basis
Reasons:
(a) CCRA and NR Can have not yet come up with the formal general guidelines in determining whether certain wells would constitute one in-situ project for the purposes of subsection 1104(7) of the Regulations. Nevertheless, such a determination could only be made based on the circumstances of the situation. The auditors are encouraged to refer the matter to us for review on a case-by-case basis. Based on certain recent cases, we provide our general comments on the matter as follows: (i) both Finance and NR Can have agreed that an in-situ project for the purpose of subsection 1104(7) of the Regulations has never been intended as an "economic unit" or "business unit", rather, it is considered as an "extractive unit" based on the concept of a mine as an "integrated system for the extraction of ore" in the mining industry; and (ii) in a situation where there is a high degree of integration of the extractive processes, it could constitute one project and therefore be deemed to be one mine.
(b) We note that unlike the provisions in paragraph 1104(7)(b) of the Regulations in respect of calcium chloride, halite and sylvite, the existing provisions in paragraph 1104(7)(c) of the Regulations only refer to "a deposit" instead of "one or more deposits". Consequently, each deposit would give rise to a separate project.
(c) It is the opinion of NR Can that the viscosity or density of hydrocarbons contained in a particular deposit of bituminous sands must be determined on the "dead oil" basis as prescribed in subsection 1107(1) of the Regulations by taking samples which may reasonably be considered as representative of the particular deposit.
National Oil and Gas Co-ordinating Meeting
Edmonton, Alberta
May 28-31, 2001
Re: Bituminous Sands In-Situ Projects
Prepared by Peter Lee
Income Tax Rulings Directorate
May 25, 2001 (#2001-008500)
Introduction
According to an article in National Post dated May 3, 2001 with respect to Syncrude's proposed $8 billion oil sands expansion project, a senior executive commented as follows: "In 1995, we didn't have any projects going ahead, and now we have $51 billion in terms of announced projects... Oil sands reserves, which rival those of Saudi Arabia, offer opportunities for more expansion...." On May 17, 2001, Canadian Natural Resources Ltd. also announced its $7 billion project to develop oil sands in the Province of Alberta. It brings the total announced oil sands projects so far to $58 billion.
Legislation
Finance proposed in the 1996 Budget and the News Release dated September 16, 1997 to treat oil sands projects as mines regardless of whether they are open pit mines or "in-situ" projects. This proposal was subsequently enacted into law effective after March 6, 1996.
Pursuant to subsection 1104(7) of the Income Tax Regulations (the "Regulations"),
(7) For the purpose 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,
(a) "mine" includes
(i) a well for the extraction of material from a deposit of bituminous sands or oil shales... but does not include (iii) an oil or gas well...
(c) all wells of a taxpayer for the extraction of material from a deposit of bituminous sands or oil shales that the Minister, in conjunction with the Minister of Natural Resources, determines constitute one project, are deemed to be one mine of the taxpayer.
Pursuant to subsection 1107(1) of the Regulations,
(1) For the purpose of the definition 'bituminous sands' in section 248(1) of the Act, viscosity or density of hydrocarbons shall be determined using a number of individual samples (constituting a representative sampling of that deposit or those deposits, as the case may be, from which the taxpayer is committed to produce by means of one mine) tested (a) at atmospheric pressure; (b) at a temperature of 15.6 degree Celsius; and (c) free of solution gas.
The terms "bituminous sands" and "oil or gas well" are defined under subsection 248(1) of the Income Tax Act (the "Act") as follows:
"bituminous sands" means sands or other rock materials containing naturally occurring hydrocarbons (other than coal) which hydrocarbons have (a) a viscosity, determined in a prescribed manner, equal to or greater than 10,000 centipoises, or (b) a density, determined in a prescribed manner, equal to or less than 12 degrees API.
"oil or gas well" means any well... for purpose of applying sections 13 and 20 and any regulations made for the purpose of paragraph 20(1)(a) in respect of property acquired after March 6, 1996, does not include a well for the extraction of material from a deposit of bituminous sands or oil shales.
Issues
A. Are there any guidelines for determining whether certain wells constitute one in-situ project for the purposes of subsection 1104(7) of the Regulations?
B. Could there be more than one deposit involved in an in-situ project?
C. How would the viscosity or density of hydrocarbons be determined under subsection 1107(1) of the Regulations?
1. Canada Customs and Revenue Agency ("CCRA") and Natural Resources Canada ("NR Can") have not yet come up with the formal general guidelines in determining whether certain wells would constitute one in-situ project for the purposes of subsection 1104(7) of the Regulations. Nevertheless, such a determination could only be made based on the circumstances of the situation. You may consider referring the matter to us for review on a case-by-case basis. Based on certain recent cases, we provide our general comments on the matter in 2 to 5 below.
2. Generally, in a bituminous sands in-situ project, steam is injected into the bituminous sands reservoir through wells. The steam and condensed water heat the viscous bitumen in the wells. The heated bitumen and water are pumped to the surface from the wells. Thereafter, the bitumen is cleaned and then is mixed with diluents to lower viscosity and density for shipment to a bitumen upgrader where synthetic crude oil is produced from the bitumen.
3. The term "project" is not defined in the Act and Regulations. The Concise Oxford Dictionary, 8th Edition, defines "project", in part as: "a plan; a scheme; a planned undertaking". The expression "Syncrude Project" was defined in the Syncrude Remission Order dated May 6, 1976 as follows: "the scheme of the participant for the recovery of leased substances from Leases 17 and 22". It appears that the Syncrude Project has been ring-fenced around the Leases 17 and 22.
4. Martland J. commented for the Court in the case of Bethlehem Copper Corporation Ltd., 74 DTC 6520 (SCC), as follows: "In my opinion there is 'a mine'... if there is a body of ore together with the workings, equipment and machinery capable of producing it." In concluding that a single mine could extract ore from more than one ore body, Pigeon J. commented for the Court in the case of MacLean Mining Company Limited, 70 DTC 6199 (SCC), as follows: "It is well known that mines often, if not generally, include several ore bodies. Parliament cannot possibly have intended that a mining concern would get the benefit of the three-year exemption whenever a new ore body was being mined". In concluding that more than one mine could extract ore from a single ore body, Bell T.C.C.J. commented for the Court in the case of Placer Dome Inc., 93 DTC 235 (TCC), as follows: "two mines exist where there is no integrated system for the extraction of ore".
5. Unlike the above-noted jurisprudence in respect of the meaning of the term "mine" in the context of the mining industry, there is no jurisprudence in respect of the meaning of the term "project" in the context of the oil and gas industry. In light of the broad ordinary meaning of the term as referred to in 3 above, without the definition similar to "Syncrude Project", a project can be any plan, scheme or planned undertaking. However, both Finance and NR Can have agreed that an in-situ project for the purpose of subsection 1104(7) of the Regulations has never been intended as an "economic unit" or "business unit". Rather, it is considered as an "extractive unit" based on the concept of a mine as an "integrated system for the extraction of ore" in the mining industry. In a recent case, due to subsurface and surface interaction in the recovery process and between processing and production facilities and wells, we have considered such operation as a single physical entity. CCRA and NR Can have confirmed in this case that it constitutes one project and should be deemed to be one mine for the purpose of paragraph 1104(7) of the Regulations, because of the high degree of integration of the extractive processes.
6. It is our understanding that the Athabasca oil sands in the Province of Alberta are divided into the four regional areas which can be further broken down into "oil sands bodies". According to a 1963 publication by the Research Council of Alberta, these bodies have a minimum thickness of 100 feet of oil-saturated sands which contain more than 4 percent by weight of oil. These bodies can be further divided into "orebodies" or "mineral resources" which can be extracted at a profit at prevailing prices. It is the view of NR Can that the term "deposit" in paragraph 1104(7)(c) of the Regulations really refers to the bituminous sands or oil shales orebodies or mineral resources. We note that unlike the provisions in paragraph 1104(7)(b) of the Regulations in respect of calcium chloride, halite and sylvite, the existing provisions in paragraph 1104(7)(c) of the Regulations only refer to "a deposit" instead of "one or more deposits". Consequently, each deposit would give rise to a separate project.
7. It is our understanding that the viscosity or density of hydrocarbons contained in a particular deposit of bituminous sands must be determined on the "dead oil" basis as prescribed in subsection 1107(1) of the Regulations by taking samples which may reasonably be considered as representative of the particular deposit.
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