10 March 2004 External T.I. 2003-0046481E5 - Deduction re Taxes on Mining Income

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.

Principal Issues: Potential concerns re the availability of a deduction in respect of taxes on mining income.

Position: General comments provided re the interpretation of the regulation in question with certain concerns being referred to the Department of Finance.

Reasons: The nature of the determinations in question, as considered in prior jurisprudence, and that certain items pertained to income tax policy.

2003-004648
XXXXXXXXXX A.A. Cameron
(613) 347-1361
March 10, 2004

Dear XXXXXXXXXX:

Re: Section 3900 of the Income Tax Regulations (the "Regulations")

We are writing further to your electronic mail message of October 21, 2003 to Natural Resources Canada, regarding the above section of the Regulations, which was forwarded for our consideration. In particular, in your message you have noted certain "concerns on the deduction for mining taxes" potentially available under that section of the Regulations.

Our Comments

The legislative amendments released by the Department of Finance on June 9, 2003, to implement the income tax changes announced in the federal budget of February 2003 for the resource sector, include a proposal to repeal the definition of "minerals" contained in subsection 3900(2) of the Regulations effective for taxation years that end after 2002.

It is indicated in the "Explanatory Notes" issued by that Department along with the above amendments that, as a result of repealing the above-mentioned definition, "the broader definition of 'mineral' in subsection 248(1) of the Act will apply for the purpose of section 3900 of the Regulations" and that the "amendment is relieving and consistent with the phase-out and repeal of paragraph 18(1)(m) of the Act."

As a consequence of the above proposed amendment, "mining operations" for purposes of section 3900 of the Regulations will no longer exclude those relating to "minerals obtained from a mineral resource", i.e., a deduction may potentially be available under that section for a broader range of "mining operations".

While these amendments may result in a deduction under section 3900 of the Regulations arising to more taxpayers, as you have noted, this provision is quite historic in nature, e.g., section 3900 of the Regulations is in substantially the same form as former section 701 thereof which it replaced in 1978. As such, the fundamental determinations to be made under this provision have not changed in many years. For example, the question as to the appropriate formula to use in the determination of the "proportion" relevant to paragraph 3900(1)(b) of the Regulations [then paragraph 701(1)(b) thereof] was addressed by the Supreme Court of Canada in the Rio Algom Mines Limited case (70 DTC 6046).

However, it would remain a question to be determined with reference to the relevant "statute or by-law" whether a deduction pursuant to section 3900 of the Regulations in respect of taxes arising under such statute or by-law would be precluded as being "imposed under a statute or by-law that is not restricted to the taxation of persons engaged in mining operations" for purposes of subsection 3900(3) of the Regulations.

In addition, it would have to be determined if amounts levied under a statute or by-law represented "taxes paid" for purposes of paragraph 3900(1)(a) of the Regulations, i.e., essentially, were such amounts levied on income from mining operations for the year as determined for purposes of the relevant provincial legislation.

With regard to the above determinations, we would note that in the Quemont Mining Corporation Limited, et al case (66 DTC 5376), the Exchequer Court of Canada had to consider whether certain "duties" levied under the Quebec Mining Act represented taxes on income from mining operations for purposes of then "section 11(1)(p)" of the Act [now paragraph 20(1)(v)]. At page 5392 of the decision it is indicated in part that:

It will be observed that the word used in section 13 is "duties" but considering the nature of those duties and having regard to the situation revealed by this legislation, there is no doubt that these duties are, in effect, provincial taxes on annual mining profits and neither can there be any doubt, in my opinion, that the type of taxation to which section 11(1)(p) of the Income Tax Act is directed is provincial taxation specifically imposed on income from mining operations which I conceive the Quebec duties to be.

							[Emphasis added.]

In our view, the above comments from the decision in the Quemont case suggest that in considering whether a particular levy is of the type in respect of which a deduction may be available under section 3900 of the Regulations, the courts are likely to look to the underlying nature of such levies. In other words, regardless of the name or title assigned to such a levy they would consider whether in effect it constitutes a provincial tax on income from mining operations for the year.

We would also note in passing that with the proposed "phase-out and repeal of paragraph 18(1)(m) of the Act" noted above, a deduction is not necessarily precluded in respect of a levy which does not constitute "taxes paid" on income from mining operations for purposes of section 3900 of the Regulations. As discussed at page 5393 of the decision in the Quemont case, it would have to be demonstrated that the levy in question was an expenditure made for the purpose of earning or producing income from a property or a business, i.e., the levy would have to have been paid to enable the taxpayer to earn profits rather than being imposed as a levy on profits when earned. In addition, any deduction potentially arising would be subject to any express limitations contained in the Act, e.g., to the extent the outlay is reasonable in the circumstances in accordance with section 67 of the Act.

In any case, with respect to your concerns regarding the complexity of section 3900 of the Regulations and the lack of a "provision for carrying over the excess mining taxes to other tax years", we are forwarding a copy of your message, along with our response, to the Department of Finance. That Department is responsible for all matters relating to tax policy and the drafting of tax legislation. If you wish to express your concerns directly to the Department of Finance, you should contact:

Mr. James Greene

Chief, Resource and Environmental Taxation Section
Business Income Tax Division
Department of Finance Canada
140 O'Connor Street
Ottawa, ON
K1A 0G5

If we can be of further assistance with regard to this matter, please contact the writer.

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

c.c. Mr. James Greene

Department of Finance

Mr. Robert Clark

Natural Resources Canada