9 January 2002 External T.I. 2001-0105125 - M&P - PROCESSING OF TAILINGS

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether the processing of a slag bi-product (tailings) from a nickel mine could be considered manufacturing or processing as defined in subsection 125.1(3) of the Act?

Position: no

Reasons: The prime metal stage is the line of demarcation between the mining and manufacturing industries. The resource profits determined under subsection 1204 of the Regulations would be deducted in computing Canadian M&P profits under Part LII of the Regulations.

XXXXXXXXXX 2001-010512
Shaun Harkin, CMA
January 9, 2002

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: Manufacturing or Processing ("M&P") Tax Credit

This is in reply to your letter of October 4, 2001, wherein you asked whether a certain activity could constitute M&P as defined in subsection 125.1(3) of the Income Tax Act (the "Act").

The activity you describe is one whereby a base metal slag, which is a bi-product of a nickel mining and refinery operation, undergoes a further process. Ore is processed and the residue is slag. Once the molten slag has been dumped into slag piles, the slag solidifies. The taxpayer is hired by the refinery to break the slag into smaller pieces. After the material is broken up, pieces with potential metal recovery are selected and separated by hand. These selected pieces are loaded into dump trucks and transported to a crushing facility where the material is ground into a finer product. After being crushed the material is turned back over to the nickel mining and refinery operation for further processing. The taxpayer is remunerated on a percentage of recovery bases by the refinery operation. As discussed in our telephone conversation of December 13, 2001 (Harkin/XXXXXXXXXX), it is understood that this activity is part of the process that leads to the production of goods that will be sold in Canada by someone other than the taxpayer.

You are of the opinion that since the slag material is not a mineral resource as defined in subsection 248(1) of the Act, as it is not a base or precious metal deposit or any of the other resources in paragraphs (b) to (d) of the definition of mineral resource in subsection 248(1) of the Act, the activity does not meet the exclusion in subparagraph 125.1(3)(f)(i) of the Act of the M&P definition.

The particular circumstances in your letter on which you have asked for our views appear to refer to a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling.

Therefore, while we cannot confirm the tax effects of the particular situation outlined in your letter, we are prepared to offer the following general comments which may be of assistance to you.

Our Comments

We agree with your opinion that the residue slag material (hereinafter referred to as the "tailings") is not a mineral resource as defined in subsection 248(1) of the Act.

It is our view that, in general, 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 section 248 of the Act, mine tailings constitute ore as the word is defined in subsection 1206(1) of the Income Tax Regulations (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.

In your opinion, the processing of the tailings is eligible for the M&P credit under section 125.1 of the Act. However, the definition of M&P 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. It is arguable that the activity of processing tailings might be considered as M&P because tailings may not be considered "from a mineral resource" and the expanded definition of ore in subsection 1206(1) of the Regulations does not apply to section 125.1 of the Act. In any event, where the processing of tailings could be considered M&P, the resource profits determined under subsection 1204 of the Regulations would be deducted in computing Canadian M&P profits under Part LII of the Regulations.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R4, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide an opinion.

We trust the above comments are of assistance.

Yours truly,

Steve Tevlin
for Director
Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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