5 July 2002 Internal T.I. 2001-0112757 - Income from Custom Processing

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 income from custom processing is included in income from a mine under Reg 1104(5).

Position: Only if it comprises less than 10% of all the ore processed by the taxpayer.

Reasons: The ordinary meaning of 'income from a mine' does not include custom processing. The term 'all or substantially all' used in 1104(5) allows incidental income from custom processing to be included in income from a mine under that paragraph, as long as at least 90% of the ore processed by the taxpayer is ore from the taxpayer's own mineral resource.

The revocation of 1104(6.1) does not alter our interpretation of the meaning of income from a mine.

July 5, 2002

Québec Tax Services Office HEADQUARTERS
Richard Cloutier Reorganizations and
Mining Industry Specialist Resources Division
David Shugar
(613) 957-2134

2001-011275

Income from Custom Processing and Income from a Mine

This is in reply to your correspondence of November 28, 2001 wherein you requested our views on the meaning of the term 'income from a mine' as used in subsection 1104(5) of the Income Tax Regulations (the "Regulations") and whether income from custom processing is included in income from a mine. All references are to the Regulations unless stated otherwise.

Our Comments

The Income Tax Act (the "Act") and the Regulations do not provide a definition of a 'mine' or of 'mining.' Since the words are not defined in the Act, reference must be made to their ordinary meaning and the meaning given by the courts. The Concise Oxford English Dictionary (7th Edition) defines a 'mine' to mean an "excavation in earth for extracting metal, coal, salt, etc." In North Bay Mica Company Limited (58 DTC 1151), the Supreme Court determined a mine as being "a mining concern taken as a whole, comprising mineral deposits, workings, equipment and machinery, capable of producing ore." In Maclean Mining Company Limited (70 DTC 6199), the Supreme Court stated that "Mining itself is completed by the production and hoisting of the ore and one can well conceive of a single mill serving several mines." In Bethlehem Copper Corporation Ltd (74 DTC 6520), the Supreme Court stated that "... there is a mine within the meaning of s. 83(5) if there is a body of ore together with the workings, equipment and machinery capable of producing it."

The term 'custom processing' is used in the mining industry but it is not used in the Act. However the term appears in the Technical Notes to the Act, as follows:

"New subsection 1104(5.1) of the Regulations provides that certain amounts are included in "gross revenue from a mine" for the purpose of Class 41 in Schedule II. Specifically, in addition to including gross revenue in respect of amounts which are included in "income from a mine" under subsection 1104(5), revenue from what is known in the industry as "custom processing", less the cost to the taxpayer of the ore or material so processed, is included in gross revenue from a mine."

"Subsection 1104(6) of the Regulations provides that, for the purposes of Class 10 in Schedule II, "income from a mine" includes the amounts specified. In particular, subsection 1104(6) provides for the inclusion in such income of income from "custom processing" for the purposes of Class 10 in Schedule II.

Subsection 1104(6) is amended consequential on the 1996 budget proposal to treat oil sands projects as mines regardless of whether they are open pit mines or "in-situ" projects. Paragraph 1104(6)(a) is amended by adding new subparagraph (iv) which describes custom processing in respect of oil sands "in-situ" projects."

In addition, the technical notes to former subsection 1104(6.1) do not use the term 'custom processing' but refer to "those who process ore as a service to others... ."

It is our understanding that in general mining terminology, a 'custom smelter' refers to a smelter which processes concentrates from independent mines. The smelter may purchase the concentrates or the smelter may be hired for a fee, to do the processing for the independent company. The contract may require the smelter to return a specified amount of processed metal to the mining company. The smelter may be entitled to retain for itself any surplus metal it recovers in during processing but the terms of a particular custom smeltering arrangement between parties may differ from case to case. The broader term 'custom processing,' therefore, based on the above meaning and the Technical Notes, would include custom smeltering and other processing activities done to ore from a mineral resource not owned by the processor. In our view, the activity of 'custom processing' includes processing ore on behalf of a third party for a fee, and processing ore that is purchased by the processor, as alluded to in the post-amble to 1104(5.1)(b) which provides for the deduction of the custom processor's cost of ore.

Based on the interpretation by the courts of the words 'mine' and 'mining,' which do not include the processing of ore, and our understanding of the term 'custom processing,' a taxpayer's 'income from a mine' would not include income from custom processing, unless the meaning of 'income from a mine' is modified by the Act or the Regulations. The definition of 'income from a mine' in subsection 1104(5) does not include income from custom processing. However, for purposes of Class 10, the definition of 'income from a mine' is extended by subsection 1104(6) to include income from custom processing.

Prior to March 6, 1996 the definition of 'income from a mine' in paragraph 1104(5)(a) required all of the ore processed by the taxpayer to be from a mineral resource owned by the taxpayer. The January 26, 1998 amendment, applicable after March 6, 1996, relaxed that condition by requiring that all or substantially all of the ore or material processed by the taxpayer must be from a mineral resource or deposit owned by the taxpayer.

The meaning of the words 'all or substantially all' was addressed in Wood v. MNR 87 DTC 312, wherein the Tax Court said that the meaning of the words 'substantially all' must be determined with reference to the specific context in which it is found. The Court stated that the term does not lend itself to a simple mathematical formula, but is better defined by "small, unrelated amounts, such as interest." In Wood, in determining whether a non-declared amount of income was substantial, the Court stated that the non-declared portion must be so insignificant that neither its inclusion nor its exclusion would make a substantial difference in the income tax return in Canada. CCRA views the phrase 'all or substantially all' as meaning '90% or more.'

Under paragraph 1104(5)(a) income from custom processing (if custom processing makes up less than 10% of all the processing by the taxpayer) would be included in the taxpayer's 'income from a mine.' However, if at least 90% of the taxpayer's total processing is not from his own mineral resource or deposit, the "all or substantially all" requirement in paragraph 1104(5)(a) would not be met and none of the taxpayer's income from processing would be included in 'income from a mine.'

The phrase 'gross revenue from a mine,' defined in subsection 1104(5.1), includes income from custom processing and applies only for purposes of paragraph (a.1) in class 41. An increase in the amount of gross revenue under item "B" in paragraph (a.1) of class 41 reduces the amount qualifying for inclusion in class 41 under that paragraph thereby reducing the amount in respect of which a higher deduction for ACCA would be available under paragraph 1100(1)(y) and (ya).

Under paragraphs 1100(1)(y) and (ya), accelerated capital cost allowance ("ACCA") is calculated on certain class 41 properties. The amount of ACCA that can be claimed is limited to 'income from the mine' as defined in subsection 1104(5). By allowing incidental income from custom processing to be included in income from a mine, as explained above, more ACCA on class 41 property would be available under the ACCA calculation at 1100(1)(y) and (ya) than had the income from custom processing been excluded from paragraph 1104(5)(a). However, if the 90% requirement in subsection 1104(5) is not met, the taxpayer would not have any 'income from a mine' on which to claim ACCA under paragraphs 1100(1)(y) and (ya).

We agree with your interpretation of the above-mentioned regulations, namely, that income from custom processing may be included in 'income from a mine', depending on which definition of 'income from a mine' is used in a particular regulation.

1104(6.1)

In your correspondence you asked for an explanation of the effect that the revocation of subsection 1104(6.1) had on the meaning of 'income from a mine' in subsection 1104(5).

The Explanatory note to subsection 1104(6.1) states the provision was introduced to clarify that 'income from a mine,' which not an all-inclusive term as defined at paragraph 1104(5), does not include income that can be reasonably attributed to a service rendered by the taxpayer, other than a service rendered by the taxpayer as a coal mine operator.

A provision that is introduced to clarify something does not usually change the law. However, it was determined that subsection 1104(6.1) was restrictive rather than clarifying, because it precluded ACCA on equipment used by a taxpayer engaged in mining activities, such as taxpayer's who provided extraction services, unless the taxpayer owned the mineral resource.

After subsection 1104(6.1) was revoked, taxpayers in a position similar to mine owners were not precluded from access to ACCA for equipment used in the operation of a mine when hired to provide such operational services. The provision was not intended to change the interpretation of the law when it was introduced and its revocation would not change the interpretation of the law after that time.

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