27 July 1995 Internal T.I. 9514966 - CAPITAL TAX - RESOURCE PROFITS

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:

Should provincial capital tax be treated as a deduction in determining resource profits under Regulation 1204.

Position TAKEN:

Provincial capital tax paid should be allocated between resource and non-resource activity and capital tax attributed to resource activity would be a deduction for determining resource profit.

Reasons FOR POSITION TAKEN:

MOU does not address capital tax paid.

Provincial capital tax is described in Regulation 1204(1)(f) and draft 1204(1.1).

		July 28, 1995

	Audit Technical Support Division	Resource Industries
	Industry Specialist Services	  Section
B. Neville	B. Rankin
	Acting Chief	(613) 957-8974

	Attention:  R. Cloutier
		7-951496

Capital Tax - Resource Profits Calculation

We are writing in response to your June 2, 1995 request for our opinion on whether producers in the Oil & Gas and Mining Industries should be required to allocate provincial capital tax between resource and non-resource activities and deduct the capital tax attributed to resource activity in determining resource profits as defined in Regulation 1204.

Within the limitation announced by the Minister of Finance on March 2, 1993, provincial capital tax is deductible for income tax purposes. Previously, Income Tax Rulings and Interpretations Directorate opined that capital tax is generally deductible in computing income from business or property unless specifically denied under the Act. That is, for the purpose of paragraph 18(1)(a) of the Act, the provincial capital tax is considered to be paid for the purpose of gaining or producing income from the business providing there is no requirement that there be income in order for the capital tax to be levied.

Under paragraph 1204(1)(f) of the Regulations, a deduction which is reasonably regarded as being applicable to production or production and processing is required to be deducted in the determination of resource profits. Draft subsection 1204(1.1) clarifies that deductions are applicable to a source of income where the deductions relate to activities that are ancillary to or in support of production. Thus, capital tax attributed to facilities and equipment used in production is considered as a deduction for the purpose of resource profits.

In respect of your analysis and conclusion concerning Mine Assessor v. Denison Mines Ltd. (Ont. Div. Ct.) April 22, 1992, we agree that capital tax is not an expense in determining income for the purpose of the Mining Tax Act, 1972 (Ontario). However, the Mining Tax Act, 1972 (Ontario) requires "proper working expenses of the mine" or office, administrative and general expense attributable to the processing to be deducted in determining the taxable profit. This is different from paragraph 1204(1)(f) of the Regulations whereby all deductions reasonably regarded as applicable to the business of production or production and processing are deducted for resource profits. Thus, the treatment of deductible provincial capital tax as a deduction for resource profits is not influenced by the Ontario decision.

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In view of the above, to the extent that provincial capital tax was deducted by the taxpayer in computing income from a business which includes resource activities of production and processing, we share your view that the provincial capital tax should be allocated for the purposes of computing resource profits and the applicable portion should be deducted in computing resource profits.

If you require further assistance, please contact the writer.

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