29 August 1995 External T.I. 9506785 - PROPERTY...IN WHICH BUSINESS OF CO CARRIED ON

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:

Meaning of "property in which the business of the company is carried on" for purposes of Article XIII of Canada-Netherlands Convention, in respect of oil and gas royalties and working interests.

Position TAKEN:

Actively engaged in the business of exploitation of natural resources means direct involvement, time, work and energy. does not include passive investment.

Reasons FOR POSITION TAKEN:

Intent. See position paper E3M04361, Question 47 APFF re SR&ED (E3M05210), E9210795 re partners.

XXXXXXXXXX				950678

Attention: XXXXXXXXXX

August 15, 1995

Dear Sirs:

Re: Disposition of Shares by a Non-Resident
Article XIII of the Canada-Netherlands
Income Tax Convention (the "Convention")

We are writing in response to your letter dated March 6, 1995 in which you requested our views on the meaning of "immovable property" in paragraph 4 of Article XIII of the Convention.

You have presented a scenario where a corporation, which is resident in the Netherlands ("Nethco") for purposes of the Convention, owns all of the issued and outstanding shares of a Canadian corporation ("Canco"), which is a private corporation within the meaning of subsection 89(1) of the Income Tax Act (Canada) (the "Act"). Canco carries on an oil and gas business in Canada and this business derives production income from properties in respect of which it has working interests, and royalty income from other properties. Nethco does not carry on business in Canada and its only Canadian interests are the shares of Canco.

It would appear that your query involves a factual situation involving a possibly completed transaction. As indicated in paragraph 21 of Information Circular 70-6R2, we are not in a position to deal with factual proposed transactions other than in the form of an advance ruling request where the identity of the parties is known and all the facts surrounding the proposed transaction are presented to us. Issues involving completed transactions should be addressed by the appropriate District Taxation Office of Revenue Canada.

There is an exclusion from the definition of "immovable property" for the purposes of paragraph 4 of Article XIII of the Convention for "property (other than rental property) in which the business of the company,... is carried on". In our view, oil and gas reserves and royalty interests will be excluded from the definition of immovable property for the purposes of paragraph 4 of Article XIII if the owner is actively engaged in the exploitation of natural resources and if such assets are actively exploited or kept for future exploitation by such owner.

It is a question of fact whether a corporation is actively engaged in the exploitation of natural resources. The fact that a corporation has a permanent staff that is dedicated to its business may be one of the factors used in the determination of whether an owner is actively engaged in the exploitation of natural resources, but it may not be the determinative factor.

In our view, as a general rule, in order for a company to be "actively engaged" in the exploitation of natural resources, the company must be directly involved in the management and daily activities of the exploitation process on a regular, continuous and substantial basis, and the company's employees must devote time, work and energy to the exploitation.

We contrast this with a passive investor or an investor who is in the business of buying and selling working interests or royalties for speculation purposes without being directly involved in the exploitation of the underlying reserves. In our view, such investors would not be considered to be actively engaged in the exploitation of natural resources. It is also our opinion that the mere buying and selling of working interests or royalties would not constitute exploitation.

Questions of fact of this nature are best resolved by officials of your local district taxation office after a thorough review of all the facts involved.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch