18 October 1982 Income Tax Severed Letter 97-2090 F

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.

RE: Application of Paragraph 212(d) of the Income Tax Act to Certain freehold petroleum and natural gas leases

Your memorandum of August 25, 1982, addressed to Non-Corporate Rulings and Publications Directorate, has been referred to this directorate for reply. You enquired as to the possible application of the Part XIII withholding requirements of paragraph 212(1)(d) to various payments to non-residents. Our views on each type of payment are set out below, in the order in which they appear in your memorandum.

1. Bonus consideration payments are a disposition of a Canadian Resource Property. Where the payee is a non-resident with no Permanent Establishment ("P.E.") in Canada and there is an applicable treaty provision exempting gains in Canada from the disposition of capital assets of non-residents with no P.E. in Canada, such as Article VIII of the Canada-U.S. Income Tax Convention, a bonus consideration payment will be considered to be an exempt gain on disposition of a capital asset. If there is no such treaty provision a bonus consideration payment received by a non-resident with no P.E. will be subject to Part I tax under paragraph 2(3)(c) and subparagraph 115(1)(a)(iii.1), by virtue of the extended definition for purposes of section 2 of taxable Canadian property, found in subsection 248(1). Subsections 116(5.2) and 116(5.3) apply to protect the Department's position as to these circumstances. Directive ASG-81-24 issued by head Office, Assessing Taxation Division, discusses the procedures for the administration of subsections 116(5.2) and 116(5.3).

2. Delay rentals paid to a non-resident and not attributable to a P.E. of the non-resident in Canada, are subject to Part XIII withholding under paragraph 212(1)(d), as stated in TOM 3769.1(3).

3. & 4. Payments of the consideration for a petroleum and natural gas lease, as described in points 3 and 4 of your memorandum, should be treated in the same way as payments of bonus consideration as described in 1 above.

5. Annual delay drilling rentals payable under a lease of mines and minerals are similar to delay rentals for petroleum and natural gas and should be treated in the manner described for delay rentals in 2 above.

6. A payment for a royalty interest in petroleum and natural gas is similar to a bonus consideration payment, and should therefore be treated in the same way, as described in 1 above.

You also asked whether the responsibility for determining if a payment is a rental or a bonus rests with the payor, and whether you should advise taxpayers that you will require the submission of a contract in each case to determine the tax implications of the types of payments listed above. These are questions of operational practice, so we have referred them to Head Office Accounting and Collections Division for reply.