4 December 1986 Income Tax Severed Letter 51816 F - Characterization for Purposes of The Petroleum Gas

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.

Dear Sirs:

This is in reply to your letter of June 27, 1986 wherein you request our opinion as to the characterization for purposes of the Petroleum Gas and Revenue Tax Act ("PGRT Act") of amounts received by an assignee under a particular royalty agreement entered into between two parties.  The provisions of the agreement may be summarized as follows:

24(1)        

The Department is not prepared to issue written opinions with respect to factual situations where the identities of the parties involved are unknown to us and where the Department has not had an opportunity to review all of the pertinent facts and background information.  We are, however, prepared to give the following general comments which may apply in your case.

The fact that there may not be a direct payment of a Crown charge by the royalty recipient does not necessarily mean that the royalty recipient is not subject to a Crown royalty.  In situations where the provisions of section 80.2 of the Income Tax Act apply, the royalty recipient would be considered t be subject to a Crown royalty.  If the terms of a royalty agreement are suchthat the recipient agrees to reimburse the payor out of the amount of his royalty for Crown charges of the payor, then section 80.2 of the Income Tax Act would apply and the royalty recipient would himself be considered to be subject t a Crown royalty and have paid an amount described in paragraph 18(1)(m) of the Act equal to the amount of the reimbursement.  Therefore, we are of the opinion, that a net overriding royalty in such situations would be a production royalty for purposes of the PGRT Act.

Where there is such a reimbursement, the payor of the royalty loses the resource allowance in respect of the royalty while the recipient would not be required to deduct the  reimbursement in determining resource profits for the purposes of calculating the recipient's resource allowance.

We trust that these comments will be of some assistance.

Yours truly,

for DirectorBilingual Services and  Resource Industries divisionRulings DirectorateLegislative and Intergovernmental  Affairs BranchReporting of Social Assistance