10 February 1999 External T.I. 9826855 - PRIME METAL STAGE OR ITS EQUIVALENT

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: What is the "prime metal stage or its equivalent"?

Position: Question of fact.

Reasons: Different for each type of metal. Generally, that point at which a marketable, saleable commodity exists.

A. Seidel
XXXXXXXXXX 								(613) 957-8974
									982685
Attention: XXXXXXXXXX 

February 10, 1999

Dear Sirs:

Re: Prime Metal Stage or its Equivalent

This is in reply to your letter dated October 9, 1998 in which you requested our views with respect to the meaning of the phrase “prime metal stage or its equivalent” in paragraph (c) of the definition of “production” in subsection 66(15) of the Income Tax Act (the “Act”) and the current depletion allowance for a mine.

The situation described in your letter appears to relate to specific taxpayers and an actual fact situation. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your local Taxation Services Office. To the extent that you require confirmation of the tax consequences of proposed transactions, we bring to your attention Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers should be the subject of a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, the following may be of assistance.

The Act does not define the expression “prime metal stage or its equivalent.” The determination of whether or not certain metals which are recoverable from an ore body have been “processed to any stage that is not beyond the prime metal stage or its equivalent” can only be determined by reviewing all of the relevant facts relating to a specific mining operation. The phrase “prime metal stage or its equivalent” was considered by the Federal Court of Appeal in an Excise Tax case, Her Majesty The Queen v. Canadian Pacific Limited and Canadian National Railways Company, and in an Income Tax case, Her Majesty The Queen v. Gulf Canada Resources Limited, 96 DTC 6065.

In the Canadian Pacific/Canadian National Railways case, Mahoney, J. made the following comments:

“The definition refers to the processing of ore, not the processing of metal. That seems to me to be the crux of the “first metal stage” concept. There is necessarily a point in the processing of a metal bearing ore to the ultimate state required by a user of the metal where what is being processed is no longer ore or concentrate or something else and is recognized by knowledgeable persons as metal. It has, at that point, reached the prime metal stage.”

and further:

“I should be surprised if the process necessary to bring ore to the prime metal stage does not vary from ore to ore and metal to metal ...”

In the Gulf case, Pratte, J., quoting Mahoney, J.A. speaking for the Court,

“In my opinion, when metallurgical and thermal coal has been processed to the condition in which it meets the specifications of its consumers and they buy and take delivery of it as coal in that condition, it has certainly reached the equivalent of the prime metal stage ...”

then made the following comments at page 6071:

“Even though this quotation dealt with the phrase as it appeared in a different statute, I see no reason to depart from the interpretation given above in the present context. In my view, the equivalent of the prime metal stage for mineral production is that point where the production processes have produced a marketable, saleable commodity which meets the specification of its consumers.”

The Act does not provide for “depletion allowance” of a mine, per se. To the extent that a taxpayer acquires any real property in Canada the principal value of which depends upon its mineral resource content (but not including any depreciable property used or to be used in connection with the extraction or removal of minerals therefrom), i.e., a “Canadian resource property” within the meaning of subsection 66(15) of the Act, the cost thereof is a “Canadian development expense” within the meaning thereof in subsection 66.2(5) of the Act.

The amount of any Canadian development expense incurred by a taxpayer is included in the calculation of the “cumulative Canadian development expense,” also defined in subsection 66.2(5) of the Act. Subsection 66.2(2) of the Act provides the amount that may be deducted in computing the taxpayer’s income for the year in respect of cumulative Canadian development expenses. The maximum annual deduction permitted for a taxation year pursuant to subsection 66.2(2) of the Act is 30%.

These comments are provided in accordance with the guidelines set out in paragraph 22 of IC 70-6R3 and are therefore not binding on Revenue Canada.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch