28 July 1983 Income Tax Severed Letter 7-2640 - [PGRT Act—Computation of Production Revenue]

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.

DATE: July 28, 1983

TO - Specialized Audit Division R.S. Hall, Director

FROM- Specialty Corporations Rulings Division Mines, Oil & Forest Industry Section J.C. Clark 593-6201

ATTENTION D.L. Cumming, Chief Industry Studies Section

RE: PGRT Act Computation of Production Revenue

File Ref.: 7-2640

This is in reply to your memorandum of June 14, 1983 in which you requested our views on the queries raised by Larry Dinnigan of Calgary District Office in his memo of June 8, 1983.

Paragraphs 83(a) and (b) of the PGRT Act exclude from production revenue, as described in section 82, any income or loss from transporting, transmitting, refining or processing of petroleum, gas and related products.

An example was given in the memorandum from Calgary in which gas was sold by a producer in 1981 at the Alberta posted field price of $2.00 per MCF (also referred to as the "wellhead" price) and transmission charges of %0.66 per MCF were billed directly to the producer for the use of a pipeline to transmit gas from the field to the point of sale.

The question raised in Calgary's memo is whether paragraph 83(b) would apply to prevent the deduction of the $0.66 per MCF transmission charge in the calculation of production revenue under section 82 of the PGRT Act. The conclusion reached in their submission is that paragraph 83(b) would apply as described. Calgary also concluded that in an oil field, if production ceases at the field tank located at the battery location, then the costs of trucking from the tank to the sales terminal are also costs of transmission which should not be deducted in determining production revenue, pursuant to paragraph 83(a) of the PGRT Act. Calgary advised that taxpayers consider transportation charges to be gathering costs which should be treated as lifting costs. The taxpayers in question believe that only the net price received after deduction of lifting costs should be included in production revenue.

Analysis and Opinion

As noted in the attached copy of our February 11, 1983 memorandum to D.N. Archer of Calgary D.O., we believe that it is necessary to attribute a profit element to the transportation function where transportation costs are incurred beyond the point at which production ceases. Paragraphs 83(a) and (b) of the PGRT Act (and subsection 1204(3) of the Regulations under the Income Tax Act) refer to an exclusion of any income or loss from transporting gas or oil, not to an exclusion of the cost of transporting gas or oil. In our opinion, the reference to income or loss requires an allocation of gross revenues to the transportation function. It is therefore our view that some reasonable allocation of gross revenues to the transportation function must be made. While we have not endorsed any particular formula for making such an allocation, we do not find an allocation of gross revenue equal to the transportation costs to be an unreasonable approach in cases where a more accurate calculation cannot be made.

The application of the interpretation given in the previous paragraph to the example submitted by Calgary would be:

Production revenue before 
paragraph 83(b) adjustment                                         $1.34

Adjustment to eliminate income from transporting gas

Revenue allocated to transportation                 $0.66
Less cost of transportation                         0.66 
Income/loss                                                    0 

Paragraph 83(b) adjustment required                                      0

Production revenue after 
paragraph 83(b) adjustment                                       1.34

It should be noted that this reasoning should also be applied for purposes of the resource profits calculation under section 1204 of the Regulations under the Income Tax Act. There should therefore be an inclusion in resource profits of $1.34 in this example.

ORIGINAL SIGNED BY

TORONTO DISTRICT OFFICE

Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch

Attachment