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 refund interest resulting from overpayment of tax could be included in the calculations of resource profits and resource allowance for the purposes of sections 1204 and 1210 of the Regulations, respectively?

Position:

No

Reasons:

Based upon the jurisprudence, the expressions "business of production" and "income from production" are used in the narrow sense for purposes of paragraph 1204(1)(b) of the Regulations. In the case at hand, there is a respectable argument that refund interest resulting from overpayment of tax should not be included in "income from production" because it is not directly related to any actual resource production.

National Mining Workshop
Kelowna, BC
May 5-8, 2003

Re: Resource Allowance on Refund Interest Resulting from Overpayment of Tax
Prepared by Peter Lee
Income Tax Rulings Directorate
May 5, 2003 (#2003-000323)

Background

By analogy to the cases of Irving Oil Limited, 2002 DTC 6716 (FCA), and Munich Reinsurance Company, 2002 DTC 6701 (FCA), it is arguable that interest received by a mining company on overpayment of tax in the normal course of its mining business would be considered as business income of the mining company for the purposes of sections 3 and 9 of the Act. It is also arguable that such interest would be included in the calculations of resource profits and resource allowance for the purposes of sections 1204 and 1210 of the Regulations, respectively. This paper is going to examine these issues.

Legislation

Pursuant to section 3 of the Act,

The income of a taxpayer for a taxation year for the purposes of this Part is the taxpayer's income for the year determined by the following rules: (a) determine the total of all amounts each of which is the taxpayer's income for the year... from a source inside or outside of Canada...

Pursuant to subsection 9(1) of the Act,

Subject to this Part, a taxpayer's income for a taxation year from a business or property is the taxpayer's profit from that business or property for the year.

Pursuant to subsection 1204(1) of the Regulations,

For the purposes of this Part, "gross resource profits" of a taxpayer for a taxation year means the amount, if any, by which the total of (a)... (b) the amount, if any, of the aggregate of his incomes for the year from... (ii) the production and processing in Canada of (A) ore... from mineral resources in Canada operated by him to any stage that is not beyond the prime metal stage or its equivalent...

Pursuant to subsection 1204(1.1) of the Regulations,

For the purposes of this Part, "resource profits" of a taxpayer for a taxation year means the amount, if any, by which the taxpayer's gross resource profits for the year exceeds the total of (a) all amounts deducted in computing the taxpayer's income for the year other than...

Our Comments

1. The ratio of the cases of Irving Oil and Munich Reinsurance is that the proposition, that interest on an income tax refund can never be business income, is simply wrong. However, it is always a question of fact whether interest received by a taxpayer on overpayment of tax would be considered business income of the taxpayer. In these cases, the Court concluded that based on the facts of the situations, interest received by the taxpayers on income tax refunds is considered business income of the taxpayers.

2. In a situation where a mining company makes overpayment of tax and receives refund interest on such overpayment in the normal course of its mining business, it is our view that based upon these jurisprudence, the mining company could include such interest in its business income for the purposes of sections 3 and 9 of the Act.

3. By analogy to the cases of Gulf Canada Limited, 92 DTC 6123 (FCA), and Gulf Canada Resources Limited, 96 DTC 6065 (FCA), it is our view that paragraph 1204(1)(b) of the Regulations is a separate code in determining income from various production or/and processing sources, independent from sections 3 and 9 of the Act. Furthermore, unlike the enactment of subsection 1204(1.1) of the Regulations subsequent to these Court decisions to refer to "all amounts deducted in computing the taxpayer's income for the year" (i.e., a reference to income calculation from a source pursuant to sections 3 and 9 of the Act to the extent of deductions only), there is no similar enactment of the reference to "all amounts included in computing the taxpayer's income for the year" in respect of resource revenue in paragraph 1204(1)(b) of the Regulations. Therefore, even though the mining company could include the interest as described in 2 above in its business income for the purposes of sections 3 and 9 of the Act, such interest may not necessarily include in the calculation of the mining company's resource profits for the purpose of section 1204 of the Regulations unless the requirements thereof are met.

4. In concluding that Syncrude had a business of production of petroleum for the whole year of 1978 in the case of Gulf Canada Resources, 96 DTC 6065 (FCA), Pratte, J. commented at pages 6067 and 6068 as follows:

In the first Gulf case relating to its 1974 income tax, it was held that the word "production" in a provision similar to section 1204 was used in the narrow sense of extraction from the ground and that, as a consequence, the only incomes and deductions referred to in that provision were those that were directly related to the actual production of petroleum.

In concluding that there was sufficient inter-connection or integration with the business of production of silver that a gain from hedging activities could be considered to be income from that business, Mackay, J. commented in the case of Echo Bay Mines, 92 DTC 6437 (FCTD), that the gain from settlement of forward sales contracts could be considered as income from production only to the extent such contracts corresponded to the plaintiff's actual silver production. Based upon this jurisprudence, it is arguable that a receipt, such as the interest described in 2 above, which is not directly related to any actual resource production, should not be included in the resource profits calculation under paragraph 1204(1)(b) of the Regulations.

5. In concluding that the business interruption insurance proceeds could not be characterized as production profits or resource profits, Reed, J. commented in the case of Cominco Ltd., 84 DTC 6535 (FCTD), at page 6538 as follows:

It is my view that the defendant's position is correct. None of the jurisprudence cited by the plaintiff goes further than to say that insurance proceeds of the kind in question should be treated as general revenues for the purposes of income. Such revenues can properly be brought within the wording of the statute because of the breadth of the wording of section 3 of the Income Tax Act.

The insurance proceeds, however, cannot be brought within the much more specific wording of regulation 1201(2) - profits (pre-May 6, 1974) and regulation 1201 - resource profits, (post-May 6, 1974). The proceeds simply did not arise out of the "production of... metal or industrial minerals" or from "the processing in Canada of ores from a mineral resource".

An appeal of this decision to the Federal Court of Appeal was dismissed [A-1324-84, December 2, 1985], and leave to appeal to the Supreme Court of Canada was refused, [1986] 1 S.C.R. vii. The Cominco case has never been explicitly overturned by the Federal Court of Appeal or Supreme Court of Canada and therefore, it is appropriate jurisprudence to rely on. Furthermore, this case is consistent with our view referred to in 4 above.

6. In the case of Gunnar Mining Ltd., 68 DTC 5035 (SCC), the Supreme Court of Canada dealt with the issue on "business of operating a mine", which is similar but broader concept than is found in section 1204 of the Regulations - "business of production". The Court concluded to exclude interest income on short-term investments from being included in "income derived from the operation of a mine" for the purposes of depletion allowance provisions under former subsection 1201(2) of the Regulations. The Court held that the income was not "profits... reasonably attributable to production of... prime metal..." despite the income relating to some extent to the mining business of the corporation. The Court commented as follows:

The income from the short term investments was not income derived from the operation of the mine but was income derived from the investment of the profits of the mine. This income from the short term investments cannot be regarded as incidental income in the operation of a mine any more than any other income gained from use of the profits of the mine could be so considered. As the learned member of the Tax Appeal Board noted in his reasons:

Even if Gunnar had held the surplus revenue from its mine on deposit, the bank interest could not be said to be derived from the operation of its mine.

Since "business of operating a mine" is a broader concept than "business of production", it is arguable that income from the short term investments of a taxpayer in a situation similar to Gunnar's should not be included in the taxpayer's "business of production" for the purpose of paragraph 1204(1)(b) of the Regulations.

7. Further to 2 above, based upon the above-noted jurisprudence and our discussions, it our view that there is a respectable argument that in a situation where a mining company makes overpayment of tax and receives refund interest on such overpayment in the normal course of its mining business, such interest should not be included in the calculations of resource profits and resource allowance for the purposes of sections 1204 and 1210 of the Regulations, respectively. These views should equally apply to an oil and gas company in a similar situation.