16 November 2006 External T.I. 2006-0197591E5 - Class 41(a), prime metal, mining tax on potash

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: 1. Whether eligible depreciable property to be acquired for a new sylvite (potash ore) mine would qualify for inclusion in paragraph (a) of Class 41. 2.Whether for the purposes of paragraphs 1104(5)(a)(i) and 1104(5)(c)(i) of the Regulations, "the prime metal stage, or its equivalent" for potash would generally be marketable potash which meets specifications on grain size and contains a minimum of 60% K2O (potassium oxide) equivalent. 3. Whether the portion of the Sask. potash production tax calculated on profits from the sale of purchased and resold processed potash by a potash producer in Sask. would qualify as an "eligible tax" for purposes of paragraph 20(1)(v) of the Act and revised subsection 3900(2) of the Regulations.

Position: 1. Yes. 2. Yes. 3. No. Such tax will not be deductible under paragraph 20(1)(v) or any other provision of the Act.

Reasons: 1. & 2. As per position taken in previous correspondence and supported by previous comments received from officials at NRCan. 3. As per the legislation and policy intent of legislation. The position taken was agreed to by CRA's Mining Industry Specialist, ISS, Compliance Branch.

2006-019759
XXXXXXXXXX Catherine Bowen
(613) 957-8284
November 16, 2006

Dear XXXXXXXXXX:

Re: Potash Mining

This is in response to your letter of July 20, 2006 wherein you requested our interpretation of whether depreciable property to be acquired for a new potash mine would be eligible for inclusion in paragraph (a) of Class 41 of Schedule II to the Income Tax Regulations (the "Regulations"). In addition, you requested our interpretation of whether the Saskatchewan potash production tax would qualify as an "eligible tax" for purposes of paragraph 20(1)(v) of the Income Tax Act (the "Act") and subsection 3900(2) of the Regulations. We apologize for the delay in responding to your letter.

In your letter, you have made detailed submissions on these issues.

Our Comments

Written confirmation of the income tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular 70-6R5 dated May 17, 2002 issued by the Canada Revenue Agency. A fee is charged for this service. Although, we are unable to provide any comments with respect to your particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.

New Potash Mine

In general, paragraph (a) of Class 41 includes depreciable property relating to a new mine that was acquired before the mine came into production in reasonable commercial quantities and that would otherwise be included in Class 28, if that class were read with certain amendments. In addition, such property must be acquired by a taxpayer principally for the purpose of gaining or producing "income from the mine" (within the meaning of subsection 1104(5) of the Regulations).

By virtue of subparagraph (d)(ii) of the definition of "mineral resource" in subsection 248(1) of the Act, a mineral resource includes a mineral deposit from which the principal mineral extracted is sylvite. It is our understanding that in Saskatchewan, potash ore is largely comprised of sylvite and halite.

Accordingly, provided that a new mine is being developed by a taxpayer to exploit a mineral deposit owned by the taxpayer from which the principal mineral to be extracted will be sylvite, depreciable property relating to this new mine that

? is acquired by the taxpayer before the mine comes into production in reasonable commercial quantities,
? would otherwise be included in Class 28 (if that class were read as described in paragraph (a) of Class 41), and
? that is acquired by the taxpayer principally for the purpose of gaining or producing income from the mine

would be eligible for inclusion in Class 41 by virtue of paragraph (a) thereof.

In addition, such property would be eligible for the accelerated capital cost allowance ("CCA") provisions (provided for in subsections 1100(1)(y) or 1100(1)(ya) of the Regulations), which permit an additional deduction for CCA generally equal to the lesser of:

a) the income for the year from the mine(s) (as defined in subsection 1104(5) of the Regulations) subject to certain adjustments, and

b) the remaining undepreciated capital cost of the property of that class as of the end of the taxation year.

For purposes of subparagraphs 1104(5)(a)(i) and 1104(5)(c)(i) of the Regulations, "the prime metal stage, or its equivalent" for potash would generally be marketable potash which meets specifications on grain size (finer grades vs. coarser grades) and contains a minimum of 60% K2O (potassium oxide) equivalent. The marketable potash normally would have been treated with anticaking amine and dedusting oil, and it would be located on the mine property, ready for shipment to customers.

Saskatchewan Potash Production Tax

In your letter you describe the calculation of the Saskatchewan potash production tax imposed on potash pursuant to section 4 and the Third Schedule of the Mineral Tax Act 1983 (Saskatchewan) entitled "Potash Production Tax". The potash production tax has two components: a "base payment" and a "profit tax". The base payment is calculated in accordance with section 5 of the Third Schedule and Part III of the Potash Production Tax Regulations (the "Potash Regulations"). The profit tax is calculated in accordance with section 6 of the Third Schedule and Part IV of the Potash Regulations. Both the base payment and the profit tax computations begin with a producer's "profits for a year", as determined under subsection 7(1) of the Potash Regulations, which includes the amount of the producer's gross revenue received or receivable from the sale or other disposition of

(a) potash produced in Saskatchewan from the mines of the producer, and

(b) processed potash purchased from another producer.

In a telephone conversation (XXXXXXXXXX/Bowen) on October 12, 2006, you indicated that the situation described in (b) above may arise where a producer of potash needs to purchase additional processed potash in order to fulfil the terms of a long-term contract with a customer.

Section 3900 of the Regulations requires that in order for a mining tax to be deductible under paragraph 20(1)(v) of the Act, it must, among other things, be an "eligible tax" that is paid or payable by the taxpayer on "income" of the taxpayer derived from "mining operations" in a province (as those terms are defined in subsections 3900(1) and (3) of the Regulations). It is our opinion that income from the sale of processed potash that is purchased by a producer and then resold by the producer is not income of the producer derived from mining operations. Therefore, the portion of the Saskatchewan potash production tax that arises as a result of including gross revenue described in (b) above in the above calculation would not be an eligible tax and would not be deducible under paragraph 20(1)(v) of the Act or any other provision of the Act. However, the portion of the Saskatchewan potash production tax that arises as a result of income derived from the taxpayer's activities specifically listed in the definition of mining operations would be an eligible tax and be deducible under paragraph 20(1)(v) of the Act (assuming that at all of the other requirements under section 3900 of the Regulations have been met).

We trust that our comments, which are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5, are of assistance.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch