1 May 2012 Internal T.I. 2011-0429421I7 - Successor Pool Reductions

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: Ordering of reductions to resource pools on disposition of a successor property

Position: Per legislation

Reasons: Confirm order of reduction to resource pools

May 1, 2012

	Jane Stalker	HEADQUARTERS
	Coordinator	Income Tax Rulings
	Industry Specialist Services	  Directorate
	Large Business Audit Division	Marc Edelson, LL.B.
	6th Floor, Minto Place, Canada Building	(613) 957-2123
	344 Slater Street
	Ottawa, Ontario K1A 0L5	2011-042942

Ordering of Reduction of Successor Resource Property Pools

We understand there may be some confusion regarding the order in which proceeds of disposition of a successor property (described below) are applied to reduce the various resource accounts of a successor corporation (described below).

In this letter, unless otherwise stated all statutory references are to the Income Tax Act (Canada). As well, we have taken the liberty of using a number of acronyms with which we believe you are familiar, particularly in respect of the successor rules for resource accounts and properties.

Our Comments

Where an oil or gas property that is a Canadian resource property (herein called the “successor property”) was acquired by a corporation (herein called the “successor corporation”) in a transaction to which the successor rules applied and is disposed of by the successor corporation, the proceeds of disposition are applied in the order and manner set forth below.

The successor corporation has the discretion to make a designation under subparagraph 66.7(4)(a)(iii) such that the proceeds of disposition of the successor property are credited to the successor corporation’s successored cumulative Canadian development expense (“CCDE”) pool prior to a reduction to the corporation's regular cumulative Canadian oil and gas property expense (“CCOGPE”) pool. The designation of proceeds under subparagraph 66.7(4)(a)(iii) must be made in prescribed form within six months following the end of the taxation year in which proceeds became receivable.

Accordingly, on the disposition of a successor property:

(a) the proceeds are first applied to reduce the corporation's successored CCOGPE balances to which the successor property relates (see subparagraph 66.7(5)(a)(ii));

(b) any unapplied portion of the proceeds, to the extent designated under subparagraph 66.7(4)(a)(iii), will reduce the corporation's successored CCDE balances to which the successor property relates;

(c) once all related successored CCOGPE and CCDE pools have been reduced to nil, the remaining proceeds will reduce the successor corporation's own regular CCOGPE pool (see element F of the definition of CCOGPE under subsection 66.4(5));

(d) if the remaining proceeds exceed the regular CCOGPE pool, the excess will reduce the successor corporation’s regular CCDE pool (see element L of the definition of CCDE in subsection 66.2(5));

(e) if unapplied proceeds remain after reduction of the successor corporation’s regular CCDE pool to nil, the excess is required to be included in income pursuant to subsection 66.2(1) and paragraph 59(3.2)(c); and

(f) to the extent that the excess amount that is included in income is reasonably attributable to proceeds of disposition of a successor property (footnote 1) , subsection 66.7(3) entitles the successor corporation to a deduction of its related successored cumulative Canadian exploration expense (“CCEE”) pool.

In other words, the deduction of successored CCEE relating to a disposition of a successor property is not allowed unless all successored and regular CCOGPE and CCDE balances of the successor corporation have been reduced to nil.

Accordingly, where a successor property is disposed of and a designation is made for the purposes of subparagraph 66.7(4)(a)(iii), the proceeds of disposition of the successor property are applied in reduction of the successor corporation’s resource pools in the following order:

1. successor CCOGPE;
2. successor CCDE;
3. regular (non-successored) CCOGPE;
4. regular (non-successored) CCDE; and
5. successored CCEE.

We trust that our comments will be of assistance.

Yours truly,

Fiona Harrision
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained
in the original document are shown below instead:

1 The amount included in income under subsection 66.2(1) could include and be attributable to other amounts as well.