11 April 1995 External T.I. 9414735 - DEDUCTIBILITY OF "NET SMELTER RETURN"

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Deductibility of a "Net Smelter Return" paid under a "Mining Lease".

Position TAKEN:

Question of fact.

Reasons FOR POSITION TAKEN:

A "Mining Lease" would be a contractual document with the rights arising thereunder presumably varying between such leases. Therefore, the appropriate treatment for income tax purposes of payments arising under such a lease would have to be determined with reference to the facts relevant to a particular situation, e.g., terms of the particular "Mining Lease", laws of the relevant jurisdiction, etc.

		941473
XXXXXXXXXX	A.A. Cameron

Attention: XXXXXXXXXX

April 11, 1995

Dear Sirs:

Re: Deductibility of a "Net Smelter Return"

This is in reply to your letter of May 30, 1994 wherein our views were requested with regard to the deductibility under the Income Tax Act (the "Act") of a "Net Smelter Return" paid or payable under a "mining lease". We apologize for the delay in replying to you.

With regard to the term "mining lease", you have indicated that:

Generally a mining lease is a contract by which the lessor grants a lease to the lessee of all of the lessor's right, title and interest and mineral rights to the mining claims. The lessee will pay, in consideration of the lease, a monthly rent plus a royalty that would generally equal a stated percentage of the "Net Smelter Return".

You have indicated that the following comments, at page 2-19 of the book Taxation of Canadian Mining Income published by Richard de Boo (the "Book"), may bring into question the deductibility of such a royalty under the Act:

Technically these payments may not be deductible since they fall after the income-earning process is completed and could not be said to have been made or incurred to gain or produce income from a business or property...

In any case, Revenue Canada's assessing policy is clearly to allow deduction of all royalties, although the matter is currently under study at Revenue Canada, and rulings officials have informally expressed the view that purchased royalties are technically not deductible by the royalty payer.

You have asked whether you can "take for granted" that Revenue Canada will allow the deductibility under the Act of a royalty paid or payable to the lessor under a "mining lease" as described above.

Our Comments

The rights arising under a "mining lease" will vary depending on the terms, conditions, etc., of the particular "mining lease" as well as the laws of the relevant jurisdiction. Therefore, it is not possible to give a definitive answer as to the deductibility under the Act of amounts paid or payable by a lessee as a royalty under such a lease. Such a determination would have to be made with reference to all of the facts of a given situation, in particular, as you have noted, in regard to the terms of the particular "mining lease".

With regard to the first quotation from the Book referred to above, the situation to which that comment is addressed is stated earlier on the same page of the Book to be:

where the royalty recipient has merely purchased a contractually created instrument which does not give rise to an interest in the mining claims itself.

In the extreme, this quotation from the Book could encompass a contract simply resulting in an assignment of income or profits (potentially not constituting a royalty at all). In such "extreme" situation the payments would clearly be made after the conclusion of the income-producing process and as such would not be deductible.

In any case, as implied by the comments contained in the Book, it would be a question of fact whether the payor of a particular royalty could establish a basis for the deductibility of same in the calculation of the payor's income for the purposes of the Act.

The foregoing comments represent our general views with respect to the subject matter of your letter. In accordance with paragraph 21 of Information Circular 70-6R2 the comments expressed herein do not constitute an advance income tax ruling and consequently are not binding on Revenue Canada.

Yours truly,

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch