27 September 2004 External T.I. 2003-0048241E5 - site reclamation costs

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: A) whether anticipated future site reclamation costs may be deducted currently; B) whether a reserve under 20(1)(m) may be deducted

Position: A) generally site reclamation costs can be deducted only when incurred or when contributions are made to a qualifying environmental trust; B) a reserve may be claimed only where an identifiable amount has been included in income under 12(1)(a) and there is an obligation to restore the site.

Reasons: review of case law

2003-004824
XXXXXXXXXX T. Harris
(613) 957-2114
September 27, 2004

Dear XXXXXXXXXX:

Re: Deduction of Reclamation Costs

We are writing in reply to your facsimile of November 12, 2003 wherein you requested our opinion concerning the time when mining and other environmental reclamation costs are deductible for purposes of computing a taxpayer's income for tax purposes.

You have referred to document 5M08860 wherein it is stated that the position of the Canada Revenue Agency ("CRA") is that "when a taxpayer makes an expenditure, for the purposes of complying with environmental legislation concerning a subsequent years reclamation expense, that the amount is not deductible pursuant to 18(1)(a) or 18(1)(e). This will continue to be the Department's position in situations where amounts are set aside or set up as reserves for reclamation costs that will incur in a subsequent year."

You have also noted that this position is consistent with the findings of various court decisions, including the cases of The Queen v. Burnco Industries Ltd., et al 84 DTC 6348 (FCA), The Queen v. Nomad Sand and Gravel Limited 91 DTC 5032 (FCA) and Northwood Pulp and Timber Ltd. v. The Queen 98 DTC 6640 (FCA).

You have, however, noted that the Ontario Court of Appeal in the case Canadian Pacific Limited v. The Minister of Revenue (Ontario), now The Minister of Finance 99 DTC 5286 allowed a current deduction for an employer's liability to reimburse workmen compensation disability awards even though payment would be made in future taxation years and the total amounts to be paid were estimated.

Finally, you have referred to the decision of the Court of Appeal for Quebec in Deputy Minister of Revenue for Quebec v. La Compagnie Meloche Inc. 2002 DTC 7169 wherein the court allowed a waste landfill operator to deduct a reserve under the provincial equivalent of paragraph 20(1)(m) of the Income Tax Act (the "Act") for the portion of fees (which was set by regulatory authorities for the purpose of funding the company's reclamation costs) it received from its customers for the collection of waste.

You have, therefore, requested whether the CRA's position on the deductibility of reclamation costs has changed as a result of the Canadian Pacific decision and, if so, under what circumstances would a deduction be permitted prior to the year in which reclamation has been carried out.

You have also asked whether the CRA accepts that a reserve may be deducted under paragraph 20(1)(m) of the Act in situations similar to that considered in the Meloche decision, i.e. where operators of mines or waste disposal sites charge and receive amounts from their customers (either as part of the purchase price of goods or services or otherwise) that will be used to reclaim their sites in future years.

Our Comments

Although the determination of whether reclamation costs of a taxpayer are deductible will depend upon the facts of a particular situation, it is the CRA's general position that reclamation costs are recognized for purposes of the Act in the year that they are incurred. As noted in your letter, this position is consistent with the existing case law on this subject.

In the Canadian Pacific case, the Ontario Court of Appeal found that the taxpayer had an existing obligation to reimburse the Workmen's Compensation Board for benefits payable to its workers and the fact that the ultimate amount to be paid may vary due to factors such as premature death or an improvement in the condition of the disabled employee did not make the amount contingent. In our view, the decision in the Canadian Pacific case was based on the particular facts of that case and can be distinguished from the types of situations considered by the Federal Court of Appeal in the cases of Burnco Industries, Nomad Sand and Gravel and Northwood Pulp and Timber. As noted by Pratte, J. in the Burnco Industries decision "An expense cannot be said to be incurred by a taxpayer who is under no obligation to pay money to anyone. .....an obligation to do something which may in the future entail the necessity of paying money is not an expense." These comments were cited with approval by Sexton, J.A. in Northwood Pulp and Timber.

A deduction may be claimed prior to the year in which the site reclamation is carried out, where the requirements of paragraph 20(1)(ss) of the Act have been met, i.e. for amounts paid in the year to a qualifying environmental trust of which the taxpayer is a beneficiary. In addition, in our response to Question 16 of the Revenue Canada - Round Table at the 1991 Canadian Petroleum Tax Society conference we indicated that

"a payment to a government-mandated site restoration fund would be deductible under the Act where, for example, the payment was made pursuant to a levy by a province which itself would be responsible for the site restoration, the payment to the province was irrevocable (that is, it had no element of refundability), the payor's obligation for the site restoration was discharged contemporaneously and the payment is not one to which paragraph 18(1)(m) of the Act applies."

With respect to your request as to whether a reserve may be deducted under paragraph 20(1)(m) of the Act in situations that are similar to the one considered in the Meloche case, such a determination would again have to be made based on the particular facts of any given situation. However, in general, it is our view that a reserve under paragraph 20(1)(m) of the Act may only be claimed in the situation where a taxpayer has received an amount in respect of the future reclamation costs which it is obligated to incur, such amount is included in the taxpayer's income by virtue of paragraph 12(1)(a) of the Act and the portion of the fee attributable to such future reclamation costs is specifically identifiable, for example, under the relevant legislation or regulations relating thereto. Where, however, the amount received is included in the taxpayer's income by virtue of subsection 9(1) of the Act as having been earned, no amount may be claimed under paragraph 20(1)(m) for such amounts. Our response to question 4 on pages 2 and 3 of Income Tax Technical News No. 30 sets out the CRA's views as to situations where subsection 9(1), rather than paragraph 12(1)(a), of the Act will apply to prepaid income.

Our comments are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5.

Yours truly,

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