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: How is an amount received for granting a lease of rights to explore for, drill for or extract petroleum, natural gas or other hydrocarbons reported for income tax purposes?
Position: May be included in income.
Reasons: The entering of such a lease is a disposition of CRP which is a reduction in the CCOGPE account. If the taxpayer's balance in the CCOPGE account is less than the amount of the lease payment, then the account will be negative and this amount will be included in income.
XXXXXXXXXX
2013-048690
L. Zannese
(613) 941-0782
June 17, 2013
Dear XXXXXXXXXX:
Re: Petroleum and Natural Gas Lease
We are writing in response to your request of April 23, 2013 where you enquired as to the tax consequences of an amount you received in exchange for granting a petroleum and natural gas lease. In a telephone conversation with you (Zannese/XXXXXXXXXX) you provided us with the following facts:
- your father owned subsurface rights on land located in XXXXXXXXXX;
- these rights allowed your father to explore for, drill for or take petroleum or natural gas with respect to the land;
- you inherited these rights at the time of your father's death. You are not certain whether a disposition of these rights was reported on your father's final income tax return.
- You have leased these rights to a corporation for a term of XXXXXXXXXX years. The corporation paid you a lump sum in XXXXXXXXXX to obtain this lease.
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 ("CRA"). A fee is charged for this service. Although we are unable to provide any comments with respect to a particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.
A Canadian resource property ("CRP") is defined under subsection 66(15) of the Income Tax Act (the "Act") as including any right, licence or privilege to explore for, drill for or take petroleum, natural gas or related hydrocarbons in Canada. Generally, the cost of acquiring this type of CRP will represent a Canadian oil and gas property expense ("COGPE") of the taxpayer and will be added to the taxpayer's cumulative COGPE ("CCOGPE") balance pursuant to element "A" of the definition of that term in subsection 66.4(5) of the Act.
Upon a taxpayer's death, paragraph 70(5.2)(a) of the Act applies such that the deceased is deemed to have, immediately before his death, disposed of any CRP owned by him and to have received proceeds of disposition equal to the fair market value of the CRP at that time. A person, other than a spouse or common law partner, who acquires the CRP as a result of the death of the taxpayer is deemed by subsection 70(5.2) to do so for the fair market value of the CRP at the time that is immediately before the death of the taxpayer.
In your situation, the deemed disposition of the CRP should have been recorded on your father's final income tax return. If this disposition did not appear on your father's final income tax return, please contact your local Tax Services Office for assistance in amending his final tax return.
Under subsection 70(5.2), you are deemed to have acquired the CRP at its fair market value immediately before your father's death and this amount should be added to your CCOGPE balance. We have not seen a copy of your lease. However, in a typical petroleum and natural gas lease, the lessor grants the oil and gas company the exclusive right to explore for, drill for and take the petroleum, natural gas and related hydrocarbons that occur on or under a particular parcel of land in return for consideration consisting of lump sum rental payments and bonus payments. Since a CRP is defined as including any right, licence or privilege to explore for, drill for or take petroleum, natural gas or related hydrocarbons in Canada, we believe that the consideration received by the lessor for entering into such a lease should be treated as proceeds of disposition of a CRP.
Where a taxpayer disposes of oil and gas property, the proceeds of disposition will reduce the CCOGPE balance. Consequently, your CCOGPE balance should be reduced by the consideration received from the corporation. If your CCOGPE balance is negative as a result of this reduction, and you do not have a balance in your cumulative Canadian development expense pool (as defined under subsection 66.2(5)), the negative amount will be included in your income for that taxation year.
We hope that these comments will be of assistance.
Yours truly,
Fiona Harrison, CPA, CA
Manager, Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
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