21 September 1989 Income Tax Severed Letter AC74067 - Characterization of Property as Real Property Situated in Canada

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.

International Audits Division                 Specialty Rulings
S. Claude Lemelin, Chief                        Directorate
Policy and Research Section                   J.E. Harms
                                              957-2109

Attention: Clayton Davies

                                              7-4067

Real Property:  Article Kill of the Canada-U.S. income Tax
                Convention (1980)(the "Treaty")

This memorandum is in response to yours of June 27, 1989 in which you requested our opinion concerning the characterization of property as real property situated in Canada which, upon alienation by a resident of the United States, can result in a taxable gain in Canada pursuant to Article XIII of the Treaty.

We understand the facts to be as follows:

24(1)

Paragraph 4 of Article XIII of the Treaty reserves to the Contracting State of residence the right to tax gains from the alienation of property other than the property referred to in paragraphs 1, 2 and 3. Thus, in order for the gain derived on the sale of shares to be taxable in Canada, the value of the shares must be derived principally from "real property situated in Canada" as contemplated by clause (b)(ii) of paragraph 3 of Article XIII.

According to Article VI of the Treaty, the term "real property" is to have the same meaning which it has under the taxation laws of the Contracting State in which it is situated (in this case, Canada) and, in any case, includes "the usufruct of real property, rights to explore for or to exploit mineral deposits. sources and other natural resources .... " The question thus arises whether, asbestos tailings constitute mineral deposits, sources or other natural resources. These terms are not defined in the Act and we therefore look to their ordinary meaning.

The dictionary meaning of "deposit" is "something laid dawn; especially matter deposited by a natural process". As indicated in the 1985 Memorandum, this is the interpretation we place on the word "deposit" and, as tailings are deposited through a man-made process, they do not constitute mineral deposits. For the same reason, the tailings also do not constitute a "natural resource". They are not the product or by-product of a natural process. In our view the tailings also cannot be considered a "source" within the context of the phrase "mineral deposits, sources and other natural resources". The use of the word "other" in this context implies that the word "natural" should be considered to modify not only "resources" but also "sources". Further, if the tailings in question could be said to be any kind of "source" or "other natural resource", they would surely have to be considered a "mineral resource". However, the term "mineral resource" is defined in subsection 248(1) of the Act as a "deposit" of certain metals, coal, sands or minerals. As indicated above, we interpret "deposit" to mean something laid down by a natural, rather than man-made, process. Therefore the tailings in question cannot be considered a mineral resource. Hence we agree with you that the right to process such tailings does not constitute a right to exploit mineral deposits, sources or other natural resources as contemplated by the definition of "real property" in Article VI of the Treaty.

Further, we agree with you that the 1985 Memorandum does not support the interpretation advanced by the International Tax Group, Toronto District Office. Although the 1985 Memorandum supports the recognition of income from the processing of tailings as resource profits, it does not follow that the exploitation of tailings constitutes the exploitation of "a mineral deposit, source or other natural resource" as contemplated by Article VI of the Treaty. Such income was recognized in the 1985 Memorandum as resource profits because the specific requirements in clause 1204(1)(b)(iii)(A) of the Regulations were met. That provision does not require the exploitation of a mineral resource. It requires only the processing of ore from mineral resources in Canada not operated by the taxpayer. The 1985 Memorandum conceded that the tailings in those circumstances constituted partially processed ore from a mineral resource. However, it was not conceded that the tailings or the refuse dump containing the stockpile of tailings therefore constituted a mineral resource.

The 1985 Memorandum recognized the tailings in question as ore "from" a mineral resource but determined that the processing of tailings does not qualify for the resource allowance under paragraph 20(1)(v.1) because that provision requires production "in respect of" a mineral resource.

Since the date of the 1985 Memorandum the Department has reversed its position with respect to income from the processing of tailings qualifying for resource allowance. We refer you to the Decision Summary of the Resource Industries Section of the Bilingual Services and Resource Industries Division dated May 22, 1986 (a copy of which is attached for your reference) in which the processing of tailings is acknowledged to be "in respect of" a mineral resource. The Decision Summary still maintains the distinction made in the 1985 Memorandum between a "mineral resource" and "ore from a mineral resource". As pointed out earlier, "mineral resource" is defined as a "deposit" which is something laid down by a natural process. This 1986 change does not affect our conclusion in the present case.

We trust that you will find this analysis useful in responding to the International Tax Group, Toronto District Office.

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