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.
J.C. Clark Tel. (613) 593-6201
February 28, 1984
Dear Sirs:
Re: Petroleum and Gas Revenue Tax ("PGRT") on Gas Consumed in Processing
This is in reply to your letter of October 20, 1983 in which you requested our opinions on certain matters related to the PGRT liability of a taxpayer which consumes gas which it has produced. We regret the delay in replying to your questions.
You pointed out that paragraph 82(2)(b) of the PGRT Act provides that:
where petroleum or gas produced or processed by a taxpayer is used or consumed at any time by him for any purpose, other than a prescribed purpose, it shall be deemed to be disposed of by him at that time for proceeds of disposition equal to its fair market value at that time.
Section 5 of the PGRT Regulations defines a prescribed purpose for purposes of paragraph 82(2)(b) of the PGRT Act as "...the earning of income by a taxpayer from a source described in paragraph 82(1)(a) or (b) of the Act..."
The sources described in paragraphs 82(1)(a) and (b) of the PGRT Act are:
(a) the production of petroleum or gas, or
(b) the processing in Canada of petroleum to any stage that is not beyond the stage of crude oil or its equivalent...
We agree with your conclusion that since the processing of gas is not a prescribed purpose, the value of gas consumed in the processing of gas would be taxable under the PGRT Act. The value of this produced gas is also includable in resource profits under section 1204 of the Income Tax Regulations (the "ITR").
You also asked the following questions:
1. What is the point at which production of gas ceases and processing begins for PGRT purposes?
2. What is the appropriate method for allocation of gas consumption volumes between production and processing?
3. What is the appropriate method to determine the fair market value of gas consumed in the processing segment?
Our answers to these questions are as follows:
Question 1
Our interpretation as to the final stage of gas production is stated as follows in paragraph 5 of IT-476 :
... in a gas field, operations involving a primary separation of the well effluent in the field together with any necessary storage operation in the field are production operations.
Our view as to the point at which gas processing commences is stated as follows in paragraph 13 of IT-145R :
In the gas industry, the processing activity would be considered to start at the point where the gas enters the gas plant or, where there is an inlet separator at the gas plant, at the point where the gas leaves the inlet separator.
Some transportation of gas may occur between the point at which production ceases and the point at which processing commences, as those points are defined in the excerpts from our IT Bulletins reproduced above.
Question 2
We have confirmed our view that paragraph 82(2)(b) requires an inclusion in production revenue of the value of produced raw gas consumed in processing. In effect this requires an attempt to determine the wellhead value of produced gas. We understand there is no market price for raw gas, as processors usually produce their own gas for output to their processing plants, or process raw gas for producers and charge a fee for the processing.
The following example will illustrate why, in our opinion, it is not necessary to account separately for volumes of gas consumed in processing, when calculating the value of raw gas produced. For purposes of this example, a simplified estimate of the value of plant input is obtained by deducting from the selling price of processed gas the actual costs of processing and a return on the investment in the gas plant.
Example
Plant sales revenue $100,000
(processed gas)
Plant expenses, excluding notional
cost of raw gas 30,000
Return on investment in the plant ("ROI") 12,500
Production costs 20,000
Using these figures the estimated value of raw gas is:
Sales $100,000
less
Plant expenses $30,000
ROI - plant 12,500
42,500
Estimated value of all produced raw gas 57,500
Production revenue would be:
Value of produced raw gas $ 57,500
less
Production costs 20,000
Production revenue 37,500
A separate accounting for produced raw gas which is consumed in processing would result in the same production revenue figure, as shown below:
Estimated value of raw gas
Sales $100,000
less
Plant expenses $30,000
ROI - plant 12,500
Value of raw gas consumed X 42,500 + X
Value of produced raw gas sold $ 57,500 - X
The value of all produced raw gas would be the total of the value of produced raw gas sold (i.e., $57,500 - X) plus the value of produced raw gas consumed (i.e., X). The sum of these amounts is (57,500 - X) + X = $57,500. Production revenue under this approach is therefore $57,500 - 20,000 = $37,500, the same figure as was determined using the first method above.
Question 3
As explained in question 2, we do not believe it is necessary to make a separate calculation of volumes of produced gas consumed. It is of course still necessary to determine the wellhead value of all gas produced, as was done in the first calculation in the example under question 2. In our opinion the use of the Rounding formula would be acceptable for this purpose.
Yours truly,
Chief
Mines, Oil & Forest Industries Section Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch
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