3 August 2001 Internal T.I. 2001-0092397 - Tailings Resource Allowance

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: 1. Whether tailings are ore, for purposes of the Act. 2. Whether clause 1204(1)(b)(iii)(A) of the regulations applies to ore that is owned by the processor. 3. Whether reliance must be placed on para 20(1)(v.1) of the Act to enable income from the processing of tailings to be included in income under regulation 1204(1)(b) of the Regulations.

Position: 1. Yes. 2. Yes. 3. No.

Reasons: 1. This letter expands on our reply given in letter E2001-0071097 on April 17, 2001. Rulings longstanding position regarding tailings meeting the definition of an ore in subsection 1206(1) of the Regulations. 2. The words of the provision are clear. The meaning of the word 'operated' does not include 'owned.' 3. The wording of clause 1204(1)(b)(iii)(A) and the definition of ore are sufficient to enable income from the processing of tailings to be included in income under paragraph 1204(1)(b) of the Regulations.

									August 3, 2001

Industry Specialist Services					HEADQUARTERS
XXXXXXXXXX 							Reorganizations and
XXXXXXXXXX  Tax Services Office				Resources Division
									David Shugar
Attention: XXXXXXXXXX
									2001-009239

Salt Sales - Resource Allowance

This is in reply to your letter of July 12, 2001, wherein you asked that we reconsider our position taken in our letter E2001-007109 of April 17, 2001 (the "April letter"), addressed to the XXXXXXXXXX Tax Services Office, in which we stated that, in the situation addressed in that letter, salt obtained from the processing of purchased mine tailings were eligible for the resource allowance by virtue of clause 1204(b)(iii)(A) of the Income Tax Regulations (the "Regulations").

You raised three concerns, namely,

1. That tailings may not be ore;

2. That clause 1204(1)(b)(iii)(A) of the Regulations may apply only to the processing of ore that is not owned by the processor; and

3. That reliance cannot be placed on the words "in respect of," in paragraph 20(1)(v.1) of the Income Tax Act (the "Act"), to bring income from the processing of mine tailings within the grasp of clause 1204(1)(b)(iii)(A) of the Regulations.

Our Comments

Tailings as an ore

The definition of 'ore' in subsection 1206(1) of the Regulations states:

"ore" includes ore from a mineral resource that has been processed to any stage that is prior to the prime metal stage or its equivalent.

Rulings' longstanding position is that, in general, tailings meet the definition of an ore, as defined in subsection 1206(1) of the Regulations, because they were originally from a mineral resource and have not been processed beyond the prime metal stage or equivalent. In the specific situation referred to in our April letter, our view was that the tailings were ore, since the tailings were originally from sylvite, a mineral resource, and had not been processed to the prime metal stage or its equivalent.

A review of various dictionaries have given the meaning of the word 'ore', and related terms, as follows:

McGraw Hill Dictionary of Scientific and Technical Terms (4th edition):

"ore [geol] 1. The naturally occurring material from which economically valuable minerals can be extracted. 2. Specifically, a natural mineral compound of the elements, of which one element at least is a metal. 3. More loosely, all metalliferous rock, though it contains the metal in a free state. 4. Occasionally, a compound of nonmetallic substances, as sulphur ore."

"ore bed [geol] An economic aggregation of minerals occurring between or in rock of sedimentary origin."

"orebody [geol] Generally, a solid and fairly continuous mass of ore, which may include low-grade ore and waste as well as pay ore, but is individualized by form or character from adjoining country rock."

"Ore crusher [min eng] A machine for breaking up masses of ore, usually prior to passing through other size reduction equipment."

"Ore deposit [geol] Rocks containing minerals of economic value in such amount that they can be profitably exploited."

"Ore dressing [min eng] The cleaning of ore by the removal of certain valueless portions, as by jigging, cobbing, or vanning."

Webster's Third New International Dictionary:

"Ore 1a: a natural or native mineral that can usu. be profitably mined and treated for the extraction of any of its constituents (iron ore) ( copper ore). b: a source from which valuable matter is extracted c: an unrefined condition or material 2: precious metal."

"ore body n: a more or less solid mass of ore that may consist of low-grade as well as high-grade ore and that is of different character from the adjoining rock."

"ore dressing n : mechanical treatment (as of low-grade ore) to separate a metallic or other valuable mineral from gangue rock and sometimes from other minerals that includes preparation (as by crushing or grinding) and concentration (as by gravity separation, flotation, magnetic separation)."

"tailing n 1. N/A. 2. inferior or refuse material separated as residue in processing - usu. used in pl.: as a: stones that tail over the largest openings of the screen of a stone crusher b: the lighter inferior coffee berries floated away in washing c: the gangue and other refuse material resulting from the washing, concentration, or treatment of ground ore. 3: the last part of something."

The Random House Dictionary of the English Language (2nd edition):

"ore n. 1. a metal-bearing mineral or rock, or a native metal, that can be mined at a profit. 2. a mineral or natural product serving as a source of some nonmetallic substance, as sulphur."

"ore body n., a well-defined mass of ore-bearing rock."

Ore dressing, metall. The mechanical processes by which valuable minerals are separated from ore."

McGraw Hill Encyclopedia of Science and Technology:

"Ore and Mineral Deposits. Ore deposits are naturally occurring geologic bodies that may be worked for one or more metals. The metals may be present as native elements, or, more commonly, as oxides, sulphides, sulphates, silicates, or some other compounds. The term ore is often used loosely to include such nonmetallic minerals as fluorite and gypsum. The broader term, mineral deposits, includes, in addition to metalliferous minerals, any other useful minerals or rocks. Minerals of little or no value which occur with ore minerals are called gangue. Some gangue minerals may not be worthless in that they are used as byproducts: for instance, limestone, for fertilizer or flux, pyrite for making sulphuric acid, and rock for road material."

Based upon the above definitions, the ordinary meaning of the terms ore body, ore bed and ore deposit refer to ore in situ. The meaning of the word 'ore', based upon the definitions above, refers to ore in situ, as well as to ore that has been removed from the ground. The words 'ore' and 'tailings' do not seem to have precise geological meanings. In the Saltco situation the tailings would constitute partially processed ore from a mineral resource. Economics determines whether anything of value can be extracted profitably from the rock, and therefore whether rock can be called ore in the ordinary meaning of the word. Consequently, material that is gangue or tailings at one time, may, at another time, have value, and be ore.

In your letter you concluded that tailings in general, may not be ore for purposes of the Act and stated that the expanded definition of ore in subsection 1206(1) of the Regulations does not apply. You reached you conclusion by examining the definition of 'ore' given in the Concise Oxford Dictionary:

"naturally occurring solid material from which metal or other valuable minerals may be extracted."

In your letter you stated "Since tailings are not considered to be accumulated by natural process, tailings may not fit in the definition of an ore...." That statement assumes that the phrase 'an accumulation by natural process' has the same meaning as the phrase 'naturally occurring solid material,' used in the various definitions of ore. In our view, the two phrases are not synonymous. Therefore, we disagree with your conclusion that tailings have to be accumulated by natural process in order to meet the ordinary meaning of ore. We agree that tailings are not a mineral resource because tailings are not a deposit, i.e., an accumulation by natural process. The process by which tailings accumulate in a tailings pond is clearly a man-made process. Ore, on the other hand, once removed from a mine, is still a 'naturally occurring solid material' from which metal or other valuable minerals may be extracted. If we were to interpret the term 'naturally occurring' as meaning ore that is untouched in the ground, it would mean that once the ore is removed from the surrounding rock, it is no longer ore because it is no longer in its 'naturally occurring' state. The question, "When does ore become something else?" was addressed in our April letter, in the comments of Mahoney J, in the Canadian Pacific/Canadian National Railways case, regarding the meaning of the term prime metal stage:

"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."

For tax purposes, subsection 1206(1) of the Regulations modifies the ordinary meaning of the word ore and provides a cut-off point, the prime metal stage, in the processing of ore after which point the material being processed is no longer ore. Operations other than crushing and grinding the ore, such as removing the impurities and valuable constituents by applying chemical treatments, thermal treatments, acid leaching-seem to change the character of the ore. It may be difficult to identify the precise point at which, as the ore is reduced from solid rock to a slurry, the ore becomes tailings or gangue. Tailings, however, by virtue of the definition of 'ore' in the Regulations can be ore for tax purposes, as long as they have not been processed to the prime metal stage or its equivalent.

The definition of 'ore' in the Regulations applies without requiring any preconditions be met. In our view, the definition of ore in the Regulations brings tailings, gangue and other ore residue within the meaning of ore under the Act. NRCan, in a letter to Rulings dated June 7, 1994, stated that the definition of 'ore' in the Regulations extends the meaning of the word 'ore' beyond its industry meaning which is more limited and would only include the rock containing the valuable mineral as it is extracted from the ground. In that letter, NRCan stated that due to the extended meaning of the word ore, ore could include, for example, arsenic sludge (which results when arsenic trioxide vapour condenses) for the purposes of the Act.

In the final paragraph of your letter you stated, "We don't believe that tailings are part of the original deposit as the original deposit has been processed to extract the principal mineral, potash." You stated that the sylvite present in the tailings is a by-product. According to the various definitions of ore in the above dictionaries, more than one mineral can be extracted from ore. Neither the dictionary meanings of ore, nor the definition of ore in the Regulations, nor the definition of 'mineral resource' in subsection 248(1) of the Act, use the term 'principal mineral,' or refer to the remaining minerals as by-products. In addition, it is not clear whether you use the term 'principal mineral' to describe the mineral with the largest value per ton, the largest weight per ton, the largest volume per ton, the mineral that is removed first, or some other criteria?

In a previous ruling, we addressed the situation where ore underwent a number of operations to extract its two main constituent minerals. In that situation we ruled that the processing of ore to obtain the second mineral would not be considered to be processing of ore to a stage that is beyond the prime metal stage or its equivalent. It is possible that a company may sell two or more different products derived from the same ore, all of which would be considered to be at the prime metal stage for purposes of subsection 1204(1) of the Regulations. In addition, the prime metal stage of a specific ore, although generally constant throughout an industry, can change in certain circumstances, not only among different taxpayers but among different products sold by the same taxpayer.

Clause 1204(1)(b)(iii)(A)

In your letter, you state that it is your view that income under clause 1204(1)(b)(iii)(A) of the Regulations must be from processing ore that is not owned by the processor. Rulings' position is that in the case of processing tailings, resource profits could be generated by a processor who had not operated the subject mineral resource, by virtue of clause 1204(1)(b)(iii)(A) of the Regulations.

Clause 1204(1)(b)(iii)(A) of the Regulations does not use the word 'owned,' but uses the word 'operated,' as follows:

(iii) the processing in Canada of

(A) 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 its equivalent.

The word 'operated' rather than 'owned' is used many times throughout paragraph (b). Those words are not defined in the Act. The difference between the two words is clear, and the difference is most apparent in the commonly seen phrase 'owned and operated.' Paragraph 1204(1)(b) of the Regulations does not state who must own the mineral resource for the provision to apply. Compare the wording in paragraph 1204(1)(b) of the Regulations with the wording of subparagraph 1104(5.1)(b)(i) of the Regulations, which refers to ore from a mineral resource not owned by the taxpayer. The word 'owned' rather than 'operated' is used in subsection 1104(6)of the Regulations, as well. In our view, the words of clause 1204(1)(b)(iii)(A) of the Regulations is clear, and only requires that the mineral resource is not operated by the processor. In our view, clause 1204(1)(b)(iii)(A) of the Regulations includes the situation you describe, as well as the situation described in our April letter. In our view, had Parliament intended to use the word 'owned' it would have done so.

In your letter you refer to the XXXXXXXXXX agreement between Saltco and Potash Corporation. The letter we received on February 19, 2001 from XXXXXXXXXX TSO, provided some details of the agreements between Saltco and Aco and Bco and referred to an amended agreement with Bco signed in XXXXXXXXXX eliminating any payment for the salt itself. We were not provided with, and did not request a copy of those agreements. In our view, our answer to the question asked, "Does the removal of water and dirt from the tailings constitute the production and processing of ore from mineral resources to any stage that is not beyond the prime metal stage or its equivalent?" applies to the Saltco case. However, if you think that the facts of Saltco's particular situation are such that clause 1204(1)(b)(iii)(A) of the Regulations would not apply with respect to Saltco, we would gladly review copies of the contracts and any additional facts of the case you think are relevant.

From a review of our letters, it appears that in 1995 there were draft regulations proposing new subsection 1206(10) of the Regulations, that would have required a taxpayer to have an ownership interest in the Canadian resource property for the purpose of income from production or production and processing under subparagraphs 1204(1)(b)(i) and (ii) of the Regulations. This regulation was not introduced. Unfortunately we have not been able to locate the backup to that letter.

Application of Paragraph 20(1)(v.1) of the Act

In your letter you state that you have misgivings in importing the phrase "in respect of" from paragraph 20(1)(v.1) of the Act to give the Regulations broader scope. Our view is that the resource allowance is calculated under the regulations without reference to paragraph 20(1)(v.1) of the Act. The wording of the regulations alone, as explained in the above section of this letter, titled "Tailings as an ore," is broad enough to include income from processing tailings in gross resource profits for purposes of calculating the resource allowance. Once a taxpayer qualifies for the resource allowance pursuant to the regulations and calculates their resource allowance, our view is that paragraph 20(1)(v.1) of the Act then permits a deduction for the resource allowance, provided the allowance is in respect of a natural accumulation of one of the items enumerated in paragraph 20(1)(v.1) of the Act.

We agree with your comments regarding sulphur not being eligible for the resource allowance until paragraph 1204(1)(b) of the Regulations was amended to specifically include sulphur. The basis for excluding revenue from gas plant sulphur from resource profits in the past was that neither sulphur nor hydrogen sulphide was considered to be a natural gas or a related hydrocarbon. Therefore, income from producing sulphur could not be included in resource income under the regulations, and the phrase "in respect of" in paragraph 20(1)(v.1) of the Act could not alter that result.

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch