5 February 1990 Income Tax Severed Letter AC00322 - Resource Allowance - Reimbursement by Taxpayer

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.

File Resource Industries
Section
Allan B. Nelson

File: 0-0322

Subject: Resource Allowance and Section 80.2

We have recently issued a ruling whereunder

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Analysis of the Law

Paragraph 20(1)(v.1) of the Act provides for a deduction in computing a taxpayer's income from a business or property in such amount as is allowed by regulation in respect of natural accumulations of petroleum or natural gas in Canada, oil or gas wells in Canada, or mineral resources in Canada.

Section 1210 of the Regulations to the Act states that “for the purposes paragraph 20(1)(v.1) of the Act, there may be deducted...(a) 25 per cent of ... (i) his resource profits for the year... computed as if no amount were deducted in computing those resource profits (A) in respect of a rental or royalty paid or payable by the taxpayer (other than...a production royalty)...exceeds the aggregate of (ii)...(iii) the aggregate of all amounts...included in his resource profits for the year that was a rental or royalty (other than a production royalty)...”.

Subsection 1206(1) of the Regulations states in part that “production royalty” means an amount included in computing the income of a taxpayer as a rental or royalty computed by reference to the amount included in computing the income of a taxpayer as a rental or royalty computed by reference to the amount or value of petroleum, natural gas or related hydrocarbons produced after 1981 from an oil or gas well in Canada, if the taxpayer has a Crown royalty in respect of such production.

Subsection 1206(9) of the Regulations states, inter alia, that for the purposes of the definition of production royalty, a “Crown Royalty” of a taxpayer in respect of the production of petroleum, natural has or related hydrocarbons from an oil or gas well in Canada means an amount (a) that would be included in computing his income by virtue of paragraph 12(1)(o) of the Act in respect of such production, if that paragraph were read without reference to the words “or a prescribed amount”, or (b) that would not be deductible in computing his income for a taxation year by virtue of paragraph 18(1)(m) of the Act in respect of such production if the paragraph were read without reference to the words “other than a prescribed amount”.

Section 80.2 of the Act provides in certain instances that where a taxpayer, under the terms of a contract, reimburses another person (i) for paragraph 12(1)(o) amounts included in that other person's income or (ii) for paragraph 18(1)(m) amounts denied as a deduction to that other person, the taxpayer shall be deemed not to have made a reimbursement to the other person but to have paid an amount described in paragraph 18(1)(m) equal to the amount of the reimbursements, and the other person shall be deemed not to have received the reimbursement from the taxpayer.

Discussion

Scenario A - No Section 80.2 Reimbursement

Where there is no section 80.2 reimbursement then we would have the following tax consequences:

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21(1)(b)

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In this regard we note the Supreme Court of Canada case of Nowegijick v H.M.T.Q. [[1983] C.T.C. 20] (1983 DTC 5041) where at page 5045 Justice J. Dickson stated “The words “in respect of” are, in my opinion, words of the widest possible scope. They import such meanings as “in relation to”, “with reference to” or “in connection with”. The phrase “in respect of” is probably the widest of any expression intended to convey some connection between two related subject matters.”

This position, as it related to a similar wording in the PGRT
Act, was adopted by us in a letter dated December 4, 1986, from
D. Senecal to 24(1) (copy attached).

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Section Chief
Resource Industries Section
Bilingual Services &
Resource Industries Division

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