28 July 1989 Income Tax Severed Letter 7-3924 - [Mine Reclamation Expenditures]

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.

G.R. White (613)957-8585

July 28, 1989

Dear XXXX

Re: Mine Reclamation Expenditures

We are writing in reply to your letter of March 31, 1989, addressed to Mr. E.J. Schermann, Chief of Audit of the Edmonton District Office in which you requested Revenue Canada's interpretation of what constitutes an allowable reclamation expense for tax purposes and how this interpretation would be applied to the requirements of Alberta's Land Surface Conservation and Reclamation Act (the "Reclamation Act").

Our understanding of the salient provisions of the Reclamation Act is as follows:

1. In order to ensure, inter alia, that a mine site is reclaimed to provincial standards prior to its abandonment, money is deposited by an operator as security into a fund, the Surface Reclamation Fund (the "Fund"), in respect of an approval by the Province of Alberta of a regulated surface operation of the operator (section 30 of the Reclamation Act).

2. The amount of the deposit is determined by regulations made by the Lieutenant Governor in Council (section 25 of the Reclamation Act).

3. The deposit is fully refundable to the operator on satisfactory reclamation of the mine site or, in the alternative, can be used by the Minister of the Environment of Alberta (the "Minister") to pay for reclamation should the operator not fulfill its obligations pursuant to a reclamation order (section 33 of the Reclamation Act).

4. If the costs of reclamation incurred by the Minister on the operator's behalf exceed the amount on deposit for the operator in the Fund, the Minister has recourse against the operator for the difference (section 46 of the Reclamation Act).

It is our view that a reclamation expense incurred in a particular year is a deduction allowed in that year for income tax purposes in determining income from a business or property provided the expense is reasonable in the circumstances, is computed in accordance with generally accepted accounting principles as established by professional accounting bodies and as interpreted by Revenue Canada and the courts and is not otherwise prohibited from deduction by a specific provision of the Income Tax Act (the "Act") - the word "incurred" for income tax purposes means that there has been a transaction in which a good has been obtained or consumed or a service has been rendered in exchange for expending cash or incurring a legally enforceable liability or obligation to pay monies in the future.

Since, in your particular case, the operator does not part irrevocably with monies paid into the Fund - once the reclamation of the mine site is completed, the operator may apply for a return of the deposit, the operator has not incurred an expense for purposes of the Act but has simply made a deposit.

This view is consistent with the view of the Department relative to the Nomad Sand and Gravel Limited case (87 DTC 5343) which is being appealed by the Department.

Even if the amounts paid into the Fund could be demonstrated to represent the future costs of reclamation, it is our view that the provisions for such future costs would be disallowed as a reserve pursuant to paragraph 18(l)(e) of the Act. This position is consistent with the decision of the Federal Court of Appeal in the case of Burnco Industries Ltd. et al (84 DTC 6348).

In summary, the ability of the operator to obtain a refund of the amounts paid into the Fund, in our view would make the payments non-deductible.

If the amounts were not refundable to the operator, payments could still be non-deductible pursuant to the provisions of paragraph 18(l)(m) of the Act. Paragraph 18(1)(m) of the Act provides that no deduction shall be made in respect of "... any amount ... paid or payable by virtue of an obligation imposed by statute to

(i) Her Majesty in right of ... a province,

(ii) an agent of Her Majesty in right of ... a province, or

(iii) a corporation, commission or association that is controlled by Her Majesty in right of.. a province or by an agent of Her Majesty in right of.. a province

as a royalty, tax..., lease rental or bonus or as an amount, however described, that may reasonably be regarded as being in lieu of any such amount, and that may reasonably be regarded as being in relation to

(iv) the acquisition, development or ownership of a Canadian resource property, or

(v) the production in Canada of...

(B) metal or minerals... from a mineral resource in Canada...".

In order to be deductible such that paragraph 18(l)(m) of the Act did not apply, payments to the Fund would need to be something other than disguised royalties, taxes, lease rentals or bonuses. Since the Reclamation Act requires these payments to be made as security for approval to commence an activity, they are made in advance of production and have some similarity to bonuses. Furthermore, if the payments were based on or computed by reference to production or expected production, they would have some similarity, to royalties, taxes or lease rentals.

In the absence of our examination of regulations to the Reclamation Act specifying how an amount paid into the Fund is to be determined, we are unable to comment more fully with respect to the possible application of paragraph 18(l)(m) of the Act.

In summary, under present tax legislation, a current deduction for an irrevocable cash payment to a government mandated fund in respect of reclamation costs would be deductible where paragraph 18(l)(m) of the Act did not apply.

Yours truly,

for Director Bilingual Services and Resource Industries Division Rulings Directorate