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: Whether the Crown charges for non-performance or under-performance of exploration or/and mining work required under a Quebec mining concession, are deductible in computing income.

Position: They can be deductible but it also depends on facts of a particular situation.

Reasons: Paragraph 1211(b) of the Regulations

July 30, 1998

	Québec Tax Services Office	Resource Industries
	Richard Cloutier	  Section
	Mining Industry Specialist	Peter Lee
(613) 957-8977

981187
Quebec Mining Act
Payments for Non-Performance or Under-Performance of Work

This is in reply to your request of May 5, 1998 for our comments in respect of the income tax treatment of payments made by mining companies for non-performance or under-performance of work relating to mining concessions as required under section 119 of the Mining Act (Quebec) (the “Mining Act”) and section 25 and 47 of the Regulations Respecting Mineral Substances Other Than Petroleum, Natural Gas and Brine (the “Mining Regulations”).

Background

Our understanding of the facts is as follows:

I. In the Province of Quebec, the mining lease and mining concession are mining rights which entitle the holder (respectively called “lessee” or “grantee”) to the exclusive right to explore for and to mine mineral substances on a specific piece of land. Mining concessions have not been issued since 1968, even though there are still many outstanding mining concessions now. The first mining leases were issued in 1966. Under the previous revision of the Mining Act, in 1966, the mining lease replaced the mining concession.

II. The lessee of a mining lease must pay an annual rental calculated at the same rates as the rental paid when the lease was issued. The rental is paid before the beginning of each year of the term of the lessee. The rental may change through time if the use of the surface changes.

III. The lessee of a mining lease must commence mining operations within four years of the date of issue of the lease. The expression “mining operations” means all operations required to extract mineral substances from a parcel of land for the primary purpose of obtaining a commercial product. The Minister may extend this date for valid reasons in which case he may set the terms and conditions, such as payment of the fees, on the extension. The grantee of a mining concession who has fulfilled the condition concerning the beginning of mining operations may obtain letters patent. The grantee must apply to the Minister for the letters patent, establishing that the mining operations have begun.

IV. The grantee of a mining concession for which letters patent have not been issued or were issued since July 1, 1911 must carry out mining operations or exploration work for a minimum value of $25 per hectare per year. He must submit a report on such work before February 1 of each year. In lieu of this work, he may pay an amount equal to the minimum amount of work required, $25 per hectare, before February 1 of each year.

Legislation

V. It is stated in sections 117 to 119 of the Mining Act as follows:

“117. The lessee shall commence mining operations within four years from the date of the lease.

Notwithstanding the first paragraph, the Minister may, where the lessee has a valid reason for requesting it, grant an extension of time on the conditions, for the rental and for the term he determines.

118. The grantee shall commence mining operations within the time allotted by the Minister under any former Act relating to mines.

Notwithstanding the first paragraph, the Minister may, where the grantee has a valid reason for requesting it, grant an extension of time on the conditions, on payment of the fee and for the term he determines.

119. Every person who has acquired a concession for which letters patent were not issued before 1 July 1911 shall, each year from the beginning of its operation, perform work on the land subject to his concession of the nature and for the minimum cost determined by regulation. However, amounts disbursed for property examination and technical assessment work shall not be accepted beyond one-fourth of the minimum cost.

A grantee who fails to perform the required work shall pay to the Minister, before 1 February of each year, an amount equal to the minimum cost of the required work or, as the case may be, to the difference between the minimum cost and the cost of the work performed and reported.

Before 1 February each year, the grantee shall report the work performedto the Minister; the report shall contain the information and be accompanied with the documents prescribed by regulation.”

VI. It is stated in section 278 of the Mining Act as follows:

“The Minister may suspend or revoke any mining right where a holder (1) does not comply with the conditions, obligations or restrictions applicable to the exercise of the mining right; (2) has not paid the annual duties, the royalties or the rental on the due date.”

VII. It is stated in section 47 of the Mining Regulations as follows:

“The holder of a claim, of a mining exploration licence, of a mining concession governed by section 119 of the Act, or of an exploration licence for surface mineral substances must carry out one or more of the following types of work: (1) survey work carried out for mining exploration purposes... (2) rock stripping, excavating in overburden and in rock, sampling, sample preparation and analysis and technical and property evaluation on land subject to a mining right... (3) in the case of an exploration licence for surface mineral substances, implementation and maintenance work on a drainage network in a peat-bog.. (4) drill-holes bored in order to obtain cores, sludge and rock fragments and penetrating at least 10 metres in unconsolidated deposits or rock and the analyses of those cores, sludge or fragments... and the measure and recording of data along drilled holes... (5) exploration and tests on the land subject to a mining right or on samples coming from it where such exploration or tests are carried out by a laboratory, an assay office or a team... with the aim of contributing to the discovery or improvement of technical methods for exploration, mining , processing or use of mineral substances; (6) technical assessments and profitability studies... (7) surveying the land subject to a mining right; (8) for the application of section 119 of the Act, mining carried out on the land subject to a mining concession.”

VIII. It is stated in section 25 of the Mining Regulations as follows:

“The minimum cost of required work under section 119 of the Act, to be carried out on the lot under a mining concession shall be $25/ha.”

Our Comments

We note that the payments made by a taxpayer pursuant to section 119 of the Mining Act and section 25 of the Mining Regulations (the “Payments”) are in respect of the non-performance or under-performance of the taxpayer’s obligation of performing minimum exploration or mining work as described in 5 and 7 above in respect of its mining concession. If the taxpayer incurred expenditures in performing such exploration or mining work, such expenditures could be considered as Canadian exploration expense (“CEE”), Canadian development expense (“CDE”) or mine operating expenses, pursuant to sections 66.1, 66.2 or 9 of the Income Tax Act (the “Act”) respectively, as the case may be. The issue that we are going to address in the following paragraphs is whether the Payments would be considered as CEE, CDE or mine operating expenses.

IX. If a taxpayer fails to pay the amounts as required under section 119 of the Mining Act and section 25 of the Mining Regulations for the non-performance or under-performance of its obligations, his relevant mining concession would be revoked pursuant to section 278 of the Mining Act. In other words, the taxpayer would have to make the Payments in order to preserve its mining concession, similar to the rental payments made under a mining lease in order to preserve the mining lease as described in 2 above.

X. It is our view that the Payments would not be considered as CEE because the requirements under paragraph (f) or (g) of the definition of CEE in subsection 66.1(6) of the Act are not satisfied: they are not incurred for the purpose of determining the existence, location, extent or quality of a mineral resource, nor are they incurred for the purpose of bringing a new mine in a mineral resource into production in reasonable commercial quantities (by analogy, see the Federal Court of Appeal decision of May 21, 1998 in the case of Teck Bullmoose Coal Inc.).

XI. It is arguable that because the Payments would preserve the right to explore for and extract mineral, such expenditures would be considered as the costs of a “Canadian resource property” within the meaning of the expression in subsection 66(15) of the Act, and would in turn be considered as CDE. However, by virtue of the wording “but not including any payment made to any of the persons referred to in any of subparagraphs 18(1)(m)(i) to (iii) for the preservation of a taxpayer’s rights in respect of a Canadian resource property nor a payment to which paragraph 18(1)(m) applied by virtue of subparagraph 18(1)(m)(v)” in paragraph (e) of the definition of CDE under subsection 66.2(5) of the Act, any payments meeting this requirement would be excluded from CDE. In the case at hand, it is our view that the Payments made to the government of Quebec would be excluded from CDE because this exclusion requirement is satisfied.

The Payments, which are made for preserving an interest in the mineral under the mining concession (i.e., such interest is generally considered as an interest in land), would also be excluded from “eligible capital expenditure” by virtue of paragraph (c) of the definition of the expression in subsection 14(5) of the Act; or paragraph (a), in view of our conclusion below.

XII. In the case of Francis D. Sparrow, 57 DTC 453 (TAB), the Tax Appeal Board concluded that the Appellant was not in a business of any kind and had owned the land and underlying minerals for many years and accordingly there could be no question of his having gone into an adventure in the nature of trade. The Tax Appeal Board also concluded that the periodic payments received by the Appellant for extension of the time limit for the commencement of drilling operations under an oil and gas lease were on account of capital. After this Board decision, the Department has taken the position that payments such as the drilling penalties, which are made under petroleum and natural gas leases in order to extend the period within which commencement of drilling is required, are payments on account of capital. In light of this position, it is arguable that an expenditure to the Crown or a provincial government for preserving a taxpayer’s mining right would be precluded from deduction in computing the taxpayer’s income by virtue of paragraph 18(1)(m) or 18(1)(b) of the Act.:

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XIII. Pursuant to paragraph 1211(b) of the Regulations, an amount would be a prescribed amount for the purposes of paragraphs 18(1)(m) and 12(1)(o) of the Act if the amount paid to, an amount that became payable to, or an amount that became receivable by a province,

“(i) that is an amount that may reasonably be regarded as being in respect of a rental for any property described in clause 66(15)(c)(ii)(B) [66(15) “Canadian resource property” (b)(ii)] or subparagraph 66(15)(c)(vi) [66(15) “Canadian resource property” (f)] of the Act,

(ii) that was paid, became payable, or became receivable prior to the commencement of production of minerals from the property referred to in subparagraph (i) in reasonable commercial quantities, and...”

XIV. In the case of Johns-Manville Canada Inc., 85 DTC 5373 (SCC), the Court decided that the continuous purchases of land by the mining company adjoining its expanding open pit mine were on income and not capital account, and hence the costs of such purchases were operating expenses to the company. These expenditures were incurred bona fide by the company in the course of its regular day-to-day business operations, were dictated by common sense, did not have the semblance of a once and for all acquisition, and were not connected with the assembly of an ore body or a mining property which could itself be developed independently of any ore body.

As discussed in 10 above, the Payments are similar to the rental payments made under a mining lease in order to preserve the mining lease. Accordingly, it is our view that there is a respectable argument that the Payments “may reasonably be regarded as being in respect of a rental for” a mining concession, even though the Payments are not referred to as “rentals” in the Mining Act and Mining Regulations, for purposes of paragraph 1211(b) of the Regulations, provided it is incurred prior to the commencement of production of minerals from the property in reasonable commercial quantities.

XV. In the case at hand, we do not have the information as to whether the Payments were made by the taxpayer prior to the commencement of production of minerals from the property of the taxpayer’s mining concession. As a result, the Payments could be true “nothing” (i.e., they would not be CEE, CDE, eligible capital expenditure, nor mine operating expense). Even if the Payments were made prior to the commencement of production, one has to determine whether the Payments would be incurred in the taxpayer’s day-to-day mining business operations. It is always a question of fact to be determined.

XVI. Our views in 16 and 17 above are consistent with the administrative position in respect of delay rental payments to the Crown in the oil and gas industry, except there is a certain dollar limitation for the latter type of payments. In the answer to question 20 of the Revenue Canada Round Table, page 319, Canadian Petroleum Tax Journal, Fall 1988, it was stated as follows:

“Delay rentals are considered to be payments on account of capital and are a cost of a resource property. Freehold delay rental payments on oil or gas leases are COGPE by definition. Delay rental payments to the Crown are specifically excluded from the definition of COGPE as they are payments for preservation of rights. Delay rental payments to the Crown would therefore appear to be non-deductible. However, we have been allowing deductions for such amounts to the extent prescribed by Regulation 1211. We have taken this position because the Department of Finance has stated that it was always intended that payments to the Crown to the extent permitted by Regulation 1211 be deductible.”

We note that the amount of deduction permitted under paragraph 1211(d) of the Regulations for a payment of “an amount as a rental for property” in the oil and gas industry is limited to not exceeding $2.50 per year per hectare. However, the amount of deduction permitted under paragraph 1211(b) of the Regulations for a payment of “an amount that may reasonably be regarded as being in respect of a rental for property” in the mining industry does not have any dollar limitation. Furthermore, it is our view that the expression “an amount that may reasonably be regarded as being in respect of a rental for property” has a broader scope to include an amount which is not a rental but may reasonably be regarded as being in respect of a rental (by analogy, see the case of Gene A. Nowegijick, 83 DTC 5041 (SCC)).

As discussed in 17 above, we do not have all of the relevant information to make a determination as whether the Payments in the case at hand would be deductible in computing income or would be a non-deductible “nothing”. If you would like us to make such a determination, please provide us all of the relevant information as described in the above.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department’s mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a severed copy using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613)957-0682. The severed copy will be sent to you for delivery to the client.

If we could be of any further assistance to you or if you have any questions in respect of the above, please contact the writer.

John Chan
Manager
Resource Industries Section
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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