22 December 1994 Internal T.I. 9424637 - PRODUCTION PAYMENT

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:

Will a carved-out production payment qualify as a "foreign resource property"?

Position TAKEN:

Production payment qualifies as a "foreign resource property" when the grantee receives an ownership interest in the minerals in-situ, an interest in the profit a prendre, or a right to take its share of production in kind.

Reasons FOR POSITION TAKEN:

See Alberta and Southern v. HMTQ, 76 DTC 5362, and Allan P. Markin v. MNR, 88 DTC 1309.

Mining Round Table
Mining Tax Conference
September, 1994

Question No.

Production Payment - Foreign Exploration and Development Expense

If a taxable Canadian corporation resident in Canada pays an amount to a foreign coal mining company in respect of the purchase of a right to receive amounts based upon its coal production, will the expenditure qualify as foreign resource property under the definition for that term in subsection 66(15) of the Act.

Department's Position

Whether or not a right to receive amounts based on coal production from a foreign coal mining company is a foreign resource property pursuant to paragraphs (a), (c), (d), (e) or (f) or (g) of the definition for Canadian resource property in subsection 66(15) of the Act, is a question of law as to what property and rights were conveyed to the grantee.

In the case Alberta and Southern Gas Co. Ltd. v. Her Majesty The Queen, 76 DTC 6362, the Federal Court-Trial Division concluded that the carved-out production payment qualified as a Canadian resource property. Alberta and Southern had acquired a percentage of Amoco's working interest in an oil and gas well. In so doing, Alberta and Southern held a right license or privilege to produce, take and dispose of petroleum substances from the lands set forth in a schedule to the agreement with Amoco. The court stated that the right to take petroleum substances is predicated upon ownership, therefore Alberta and Southern acquired a Canadian resource property.

We are presently considering two carved-out production payment agreements with respect to coal produced from mines located in the U.S. Our response will take into consideration the Federal Court - Trial Division decision in Alberta and Southern, as well as the Tax Court of Canada decision in Allan P. Markin v. The Minister of National Revenue, 88 DTC 1309. In Markin the Tax Court of Canada concluded that a performance bonus reserved to Markin did not have the character of an interest in the oil or gas in-situ nor did the bonus grant a profit a prendre interest, thus Markin did not dispose of an Canadian resource property when his former employer paid an amount for Markin's right to receive the bonus. The Tax Court of Canada found that Markin's right to the performance bonus was not a right in the oil and gas wells. Thus, Markin did not have an ownership interest of any kind with respect to the oil or gas properties or the production therefrom. The Markin decision confirms the conclusion reached in Alberta and Southern. Accordingly, a production payment is a Canadian resource property or foreign resource property, as the case may be, when the grantee owns a right to the production in situ or a profit a prendre which entitles the grantor to produce and sell that production.

Author: Bruce Rankin
File: 7- 942463
Date: September 30, 1994