2011 Ruling 2009-0314541R3 - Oil Sands Project

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.

Principal Issues: Whether the XXXXXXXXXX wells of the project constitute one mine and whether depreciable property to be used in the project is property described in Class 41.1?

Position: Yes.

Reasons: Opinion received from NRCan and review of submitted documentation. Since depreciable property acquired for the project is not grandfathered, it will be included in Class 41.1 (not Class 41) such that accelerated CCA will be phased out as provided in Regulation 1100(1)(y.1).

XXXXXXXXXX
									2009-031454
									XXXXXXXXXX
Attention:	XXXXXXXXXX 

XXXXXXXXXX , 2011

Dear Sir:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted party. We also acknowledge all additional information in connection with your requests, both in correspondence and in our various telephone conversations.

We understand that to the best of your knowledge and that of the Corporation (as herein defined), none of the issues contained herein:

(a) was dealt with in an earlier return of the Corporation, or any person related thereto; or

(b) was being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Corporation, or any person related thereto; and

as of the date hereof none of the issues contained herein:

(c) is under objection by the Corporation, or any related person;

(d) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; or

(e) is the subject of a ruling previously considered by the Directorate, except as specifically described below.

XXXXXXXXXX

DEFINITIONS

Unless otherwise indicated, in this ruling:

"ACCA" means accelerated CCA, being the additional amount allowed on account of CCA under paragraph 1100(1)(y.1) of the Regulations;

"Act" means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp), as amended to the date hereof;

"Additional Well Pads" has the meaning assigned by paragraph 16(a) below;

"Additional Well Pairings" has the meaning assigned by paragraph 16(a) below;

"Buildings" has the meaning assigned by paragraph 17 below;

"CCA" means "capital cost allowance" which refers to a deduction allowed under section 1100 of the Regulations;

XXXXXXXXXX ;

"Central Processing Facility" has the meaning assigned by paragraph 15 below;

"Corporation" means XXXXXXXXXX , a corporation validly existing under the XXXXXXXXXX that has its head office and principal place of business at XXXXXXXXXX ;

"Formation" has the meaning assigned by paragraph 6 below;

"Initial Well Pads" has the meaning assigned by paragraph 16(a) below;

"Initial Well Pairings" has the meaning assigned by paragraph 16(a) below;

"Leases" means XXXXXXXXXX ;

"ParentCo" means XXXXXXXXXX , a corporation validly existing under the XXXXXXXXXX that has its head office and principal place of business at XXXXXXXXXX ;

"PredecessorCo" means XXXXXXXXXX ;

"private corporation" has the meaning assigned to that term in subsection 89(1) of the Act;

"Project" has the meaning assigned by paragraph 6 below;

"public corporation" has the meaning assigned to that term in subsection 89(1) of the Act;

"Regulations" means the Income Tax Regulations, as amended to the date hereof;

"Road" has the meaning assigned by paragraph 18 below;

"XXXXXXXXXX Facilities" means the key XXXXXXXXXX components that will be required in the bitumen recovery process as described in paragraph 16 below;

"specified oil sands property" has the meaning assigned to that term in subsection 1104(2) of the Regulations;

"subsidiary wholly-owned corporation" has the meaning assigned to that term in subsection 248(1) of the Act;

"taxable Canadian corporation" has the meaning assigned to that term in subsection 89(1) of the Act;

"UCC" or "undepreciated capital cost" has the meaning assigned to that term in subsection 248(1) of the Act;

"Well Pads" has the meaning assigned by paragraph 16(a) below; and

"Well Pairings" has the meaning assigned by paragraph 16(a) below.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

BACKGROUND FACTS

1. The Corporation;

(a) XXXXXXXXXX ;

(b) is a resident of Canada and is a taxable Canadian corporation;

(c) has a taxation year end of XXXXXXXXXX ;

(d) files its tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office;

(e) is a subsidiary wholly-owned corporation of ParentCo; and

(f) is an indirect wholly-owned subsidiary of XXXXXXXXXX , a corporation formed under the laws of the XXXXXXXXXX .

2. PredecessorCo was continued under the XXXXXXXXXX on
XXXXXXXXXX and was wound up into the Corporation effective XXXXXXXXXX . At all material times prior to its dissolution, PredecessorCo;

(a) was a resident of Canada and a taxable Canadian corporation as defined in subsection 89(1) of the Act;

(b) was neither a public corporation nor a private corporation;

(c) had a taxation year end of XXXXXXXXXX and Business Identification Number XXXXXXXXXX ;

(d) filed its tax returns at the XXXXXXXXXX Taxation Centre and dealt with the XXXXXXXXXX Tax Services Office;

(e) was a subsidiary wholly-owned corporation of the Corporation; and

(f) was an indirect wholly-owned subsidiary of XXXXXXXXXX .

3. ParentCo:

(a) has a taxation year end of XXXXXXXXXX and Business Identification Number XXXXXXXXXX ; and

(b) files its tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office.

4. ParentCo and the Corporation are each a "principal-business corporation" as defined in subsection 66(15) of the Act in that their principal business consists of XXXXXXXXXX .

5. DELETED

THE PROJECT

Overview - Leases and Deposits

6. The project (the "Project"), XXXXXXXXXX , is a project for the recovery of in-situ bitumen from the formations (the "Formation") that are the subject of the Leases:

(a) XXXXXXXXXX

(b) XXXXXXXXXX

7. The Project involves in-situ bitumen recovery using XXXXXXXXXX recovery technology to extract approximately XXXXXXXXXX barrels per day ("bpd") of bitumen, being the project's annual average production limit stipulated by the XXXXXXXXXX in the Project's approval (see paragraph 9 below) and being its rated capacity. Total recoverable resources from the Formation are estimated at over XXXXXXXXXX barrels. The bituminous sands are buried more than XXXXXXXXXX meters below the surface and are not amenable to surface mining techniques.

8. All of the bitumen to be recovered from the Project will be from the same deposit of "bituminous sands", as that term is defined in subsection 248(1) of the Act. The hydrocarbons recovered will meet the viscosity and density requirements outlined in the definition of bituminous sands, determined and tested in the manner referred to in subsection 1107(1) of the Regulations. Specifically, the bitumen has a density of less than 12 degrees API and a viscosity of greater than 10,000 centipoise measured at atmospheric pressure, at a temperature of 15.6 degrees Celsius and free of solution gas.

9. In XXXXXXXXXX the Corporation filed an Application for Approval with XXXXXXXXXX to construct and operate the Project. Regulatory approvals to construct and operate the Project were granted in XXXXXXXXXX .

10. On XXXXXXXXXX , the Corporation entered into an Engineering and Design Contract with XXXXXXXXXX , that engaged XXXXXXXXXX to design and engineer the Central Processing Facility for the XXXXXXXXXX Facilities.

11. On XXXXXXXXXX , the Corporation entered into an Engineering and Design contract with XXXXXXXXXX that engaged XXXXXXXXXX to engineer the pads and flowlines of the Project.

12. Procurement and construction management is being managed by the Corporation for all of the XXXXXXXXXX Facilities.

12.1 None of the property acquired for the purpose of earning income from the Project will qualify as "specified oil sands property".

Bitumen Recovery Process

13. The Project utilizes surface and subsurface facilities that operate as a single integrated entity for the extraction of a bitumen emulsion from the Formation using XXXXXXXXXX technology, the recovery on the Project site of bitumen from the emulsion and the export of the recovered product off the Project site by pipeline.

14. The subsurface facilities of the XXXXXXXXXX process rely on steam and gravity to heat and recover bitumen. Under the XXXXXXXXXX process, pairs of horizontal wells are drilled into the oil sands. In the upper well (the "injection well"), steam is introduced to heat the bitumen-bearing formation so that the viscosity of the bitumen is lowered and, under the influence of gravity, the bitumen drains to the lower well (the "production well") at the bottom of the reservoir where it is pumped to the surface as an emulsion of bitumen, steam, water and solution gas.

15. On the surface, steam generators will produce steam for delivery by pipeline to the injection wells. Separators located at each well pad collect the produced emulsion and separate a portion of the gas from the emulsion. The produced emulsion is transported by pipeline to the central processing facility (the "Central Processing Facility") where, as described in greater detail in paragraph 16(b) below, the produced bitumen emulsion is separated into its component parts and those component parts are then further treated or processed. A blended bitumen product is piped from the Central Processing Facility to holding tanks for storage and, from the tanks, the blended bitumen is piped for sales to the XXXXXXXXXX described in paragraph 21 below.

Bitumen Recovery Facilities

16. The key XXXXXXXXXX components that will be required in the bitumen recovery process (collectively, the "XXXXXXXXXX Facilities") are as follows:

(a) Well Pads and Associated Facilities. It is anticipated that there will initially be XXXXXXXXXX surface well pads (the "Initial Well Pads"), each with approximately XXXXXXXXXX well pairs (the "Initial Well Pairings"). Each well pair will consist of one injection well and one production well. Throughout the balance of the production cycle of the Project approximately XXXXXXXXXX additional Well Pairings (the "Additional Well Pairings" and, together with the Initial Well Pairings, called the "Well Pairings") will be drilled from approximately XXXXXXXXXX additional surface well pads (the "Additional Well Pads" and, together with the Initial Well Pads, called the "Well Pads"). The Additional Well Pads and the Additional Well Pairings will be drilled as required in order to maintain average daily production at XXXXXXXXXX bpd of bitumen.

(i) In addition to the Well Pairings, each Well Pad will consist of:

• production and injection wellheads;
• wellhead collection piping;
• a group and test separator and related building;
• production and injection manifold headers and a manifold building;
• a blowdown pop tank;
• group flowlines;
• produced fluids separation, metering and pumping facilities;
• an electrical transformer;
• electrical motor control center and instrumentation building;
• surface water drainage collection area; and
• a topsoil conservation stockpile area.

(ii) Natural gas will be injected into the production well to manage the pressure in the well (such natural gas is referred to as "lift gas").
Injecting the lift gas will assist in causing a bitumen emulsion to flow up the production well to the surface and will also assist in maintaining the pressure in the well.

(iii) The group and test separators located on the Well Pad will collect the produced emulsion from all of the Well Pairings on the Well Pad and separate a portion of the gas from the emulsion. The separated gas will be transported by pipeline from the Well Pad to the produced gas separator (see paragraph 16(b)(v) below). The emulsion will be transported by pipeline to the Central Processing Facility for further processing.

(iv) The Well Pads will be connected to the Central Processing Facility via a series of corridors containing pipelines, power lines and access roads.

(v) There will be observation and monitoring wells associated with the well pads.

(b) Central Processing Facility: The Central Processing Facility will be comprised of the following primary facilities:

(i) Steam Generation Facility: A steam generation facility which will use natural gas to heat water to generate steam for injection into the Formation via the injection wells. It is expected that there will be up to six steam generators operating in parallel. Fuel gas for the steam generators will be provided by sweet gas purchased from third parties on the XXXXXXXXXX as well as the produced solution gas recovered from the production treatment (described below). XXXXXXXXXX .

(ii) Water Supply Wells: Water supply wells which will supply water for use in the steam generation facility.

(iii) Production Separation System: The produced emulsion entering the Central Processing Facility will consist of bitumen, steam, water in the form of condensed steam, formation water and solution gas. The produced emulsion will enter the separation system through an inlet separator at approximately XXXXXXXXXX kPag. To assist in the separation of the oil and water, diluent will be added to the streams before they pass through the in-line static mixers and into the inlet separator. The separation system will separate the produced emulsion into its component parts. The inlet separator will use three-phase gravity separation, with vapour leaving from the top, the bitumen leaving from the middle and the produced water leaving from the bottom. After degassing, the emulsion will be cooled through a heat exchanger to approximately XXXXXXXXXX ° C.

(iv) Emulsion Treating System: The water content in the bitumen will typically be less than XXXXXXXXXX % as the bitumen leaves the production separation system and is split into two streams that feed the XXXXXXXXXX treaters. After treatment, the blended emulsion will be piped to storage tanks for shipping. Water removed from the emulsion will be routed to the water treatment systems.

(v) Produced Gas Separator: Produced gas removed from the emulsion at the Well Pads and in the production separation system will contain liquids in the form of condensed steam and some hydrocarbons (including the lift gas and solution gas). This produced gas will be cooled and separated in the produced gas separator. Natural gas liquids recovered from the produced gas separator will be routed to the three-phase gravity separators. Dry natural gas will be fed into the mixed fuel gas separator for use in the various Central Processing Facility functions. Water removed from the gas will be routed to the water treatment systems.

(vi) Mixed Fuel Gas Separator: Natural gas collected from the production treatment will be combined with purchased sweet fuel gas in the mixed fuel gas separator, and the combined gas will be used to fuel the steam generators.

(vii) Produced Water Separation: The produced water from the production separation system will be cooled by a glycol heat exchanger before it is combined with the water phases from the produced gas separator and the emulsion treatment system. This produced water will be directed to the XXXXXXXXXX tank prior to further treatment and recycling. Oil will be removed from the water in the XXXXXXXXXX tank and routed to the emulsion treatment system.

(viii) Water De-Oiling System: The water de-oiling system, the main components of which are XXXXXXXXXX , will remove any remaining oil in the produced water so that the water can be treated for recycle to the steam generators. Any recovered oils will be returned to the production
separation system. Once the water has passed through the water de-oiling system, it will be stored in the de-oiled produced water tank before being transferred to the produced water treatment facility.

(ix) Produced Water Treatment: The produced water treatment facility will remove the hardness, silica, oxygen and alkalinity from the de-oiled produced water. Produced de-oiled water, a portion of steam generator blowdown water and chemicals will be fed into XXXXXXXXXX softener unit where the bulk of the water treatment will occur. Treated water that is suitable to supply to the steam generators will be transported to the boiler feed water tank. A disposal water tank, pump and pipeline will transport disposal waters to disposal wells.

(x) Vapour Recovery System: The vapour recovery system will improve the overall plant efficiency by recovering vapours for use as fuel gas. The vapour recovery system gathers vapours from storage tanks and process vessels. A sweet fuel gas blanket will be supplied at a slightly positive pressure on all tanks with potential hydrocarbon vapours. The vapour recovery system will include separation vessels and a compressor to feed the recovered vapours into the mixed fuel gas separator (see above).

(xi) Cooling and Heating Systems: The various process streams will require heating and cooling. Heat integration will enable the use of hot streams that need cooling to be exchanged with cold streams that require heating. The main heating and cooling medium will be glycol.

(c) Natural Gas Pipelines: A portion of the natural gas required for the Project will be purchased from third parties and transported to the Project site via a pipeline that will be constructed by the Corporation and tied into the XXXXXXXXXX . A series of other natural gas pipelines will be tied into this main pipeline at the Project site for the purposes of supplying natural gas to the production wells, the mixed fuel gas separator and the Central Processing Facility.

(d) Surface Pipelines and Controls: All pipelines and pressure control systems needed to transport fluids to and from the Well Pairings and the other XXXXXXXXXX Facilities, including all production gathering pipelines, water pipelines, steam distribution pipelines, natural gas distribution pipelines and vapour return pipelines.

(e) Utility Systems: Utility systems, such as emergency back-up power generators, instrument air, power distribution lines, solids disposal and a drain system, will be required and will be integrated into the Central Processing Facility and the Well Pads.

(f) Water Disposal Wells: The water disposal wells will be used for water that cannot be re-used for steam generation. Water disposal wells will be drilled, completed and tested within XXXXXXXXXX standards and each well will be equipped with a surface installed turbine meter, flow choke and a pressure recorder.

(g) Storage Tanks: The Project will include a number of above ground storage tanks, some of which are part of the process while others will be used for feed chemicals or product storage. The storage tanks that will be used in the Project include:

(i) Finished Product tank - for the storage of blended oil that meets pipeline specifications;

(ii) Diluent storage tank - for storage of diluent for blending with production emulsion;

(iii) XXXXXXXXXX - part of the water de-oiling system;

(iv) Oil recovery tank - part of the water de-oiling system;

(v) De-oiled produced water tank - for the storage of produced de-oiled water prior to the final water treatment stage;

(vi) Boiler Feed Water tank - for the storage of demineralized water suitable to supply to the steam generators;

(vii) Blowdown Disposal tank - for the storage of waste water stream from steam generators before disposal;

(viii) Neutralization tank - receives regeneration wastes from the XXXXXXXXXX and polisher prior to deep well disposal (part of the produced water treatment system);

(ix) XXXXXXXXXX tank - part of the produced water treatment system;

(x) XXXXXXXXXX tank - part of the produced water treatment system;

(xi) Recycle tank - Stores water to be reintroduced to de-oiling process;

(xii) Source water tank - for the storage of make-up water;

(xiii) Acid storage tank - part of the produced water treatment system;

(xiv) Caustic storage tank - part of the produced water treatment system;

(xv) Disposal water tank - collects steam condensate blowdown for recycle and deepwell injection;

(xvi) Diesel storage tank - for the storage of diesel for backup generator; and

(xvii) Glycol surge tank - surge storage of glycol.

(h) Camps Facilities: The Corporation is also constructing a XXXXXXXXXX man permanent camp, on site, to house employees during operations.

(i) Other Infrastructure: Other infrastructure related to the Central Processing Facility will include:

• perimeter fencing;
• flare stacks;
• aboveground pipe racks;
• glycol aerial coolers;
• XXXXXXXXXX pond systems;
• sewage pond;
• storm water runoff pond;
• pumps;
• control systems;
• electrical transformers;
• power distribution lines;
• potable water system; and
• sewer system.

17. Most of the major equipment used in the Central Processing Facility will be housed in steel framed buildings (the "Buildings"). Most of the equipment will be modularized for ease of construction. In addition to the permanent camp, it is currently expected that the Buildings will include:

(a) an emulsion treatment building;

(b) a produced water de-oiling building;

(c) a produced water treatment building;

(d) a steam generator building;

(e) a vapour recovery building;

(f) an emergency diesel generator building;

(g) a pond pumping station building; and

(h) an administrative, control and maintenance building.

18. In addition to the access roads connecting the Well Pads to the Central Processing Facility (referred to in paragraph 16(a)(iv) above), the Corporation has built an access road that is XXXXXXXXXX .

19. DELETED

20. During the start-up period of the production phase of the Project, the reservoir will be heated by circulating steam in both the injection wells and the production wells for a period of approximately XXXXXXXXXX months. The extensive heat reduces the viscosity of the surrounding bitumen and allows for communication between the wells. This helps establish the bitumen flow towards the production wells.

21. The bitumen produced from the Project will not be processed at the Project site. Rather, diluent will be added to the raw bitumen at the Central Processing Facility in order to maintain the density and viscosity within a range that can be transported by pipeline. The bitumen will be sold to a third party with upgrading facilities and transported to the third party using a pipeline and related facilities XXXXXXXXXX .

22. As bitumen recovery begins to decline in some of the Initial Well Pairings, the Additional Well Pairings will be drilled and connected to the same Central Processing Facility to replace the bitumen production lost from those existing wells. The estimated production life of the Project is XXXXXXXXXX years. The development plan is designed so that production will take place sequentially involving approximately XXXXXXXXXX Well Pads.

PROPOSED TRANSACTION

23. The Corporation proposes to complete the implementation of the Project, including the development and construction of the XXXXXXXXXX Facilities, the Buildings and the Road in the manner referred to in paragraphs 16, 17 and 18 above.

24. The construction of the XXXXXXXXXX Facilities (other than the Additional Well Pads and the Additional Well Pairings) began in XXXXXXXXXX and was completed in XXXXXXXXXX , with commercial production expected to begin in XXXXXXXXXX .

PURPOSE OF THE PROPOSED TRANSACTION

25. The purpose of the proposed transaction is to enable the Corporation to develop an additional alternative oil production project for the purpose of pursuing its goal of accessing a key source of long-term energy supply in XXXXXXXXXX .

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, we confirm the following:

A. For the purposes of paragraph 1100(1)(y.1), subsections 1101(4e) and 1102(8) and (9) and section 1107 of the Regulations and Class 41.1 of Schedule II, all of the Well Pairings for the Project as described in paragraphs 16 and 22 are sufficiently integrated to constitute one project and will be deemed to be one mine pursuant to paragraph 1104(7)(c) of the Regulations (the "Mine").

B. Depreciable property that is described in any of paragraphs 16 through 18 hereof that is part of the XXXXXXXXXX Facilities, the Buildings or the Road, that is acquired after March 18, 2007 and before 2016 and that would be included in paragraph (a) of Class 41 if it was acquired before March 19, 2007 on the basis that

(i) but for Class 41, the property would be included in Class 10 because of paragraph (g), (k) or (l) of Class 10, or

(ii) the property would be included in Class 41 because of subsection 1102(9) of the Regulations and no election has been made to include the property in Class 43.1 or 43.2,

will be property described in Class 41.1, provided that

(iii) the Mine comes into production in reasonable commercial quantities;

(iv) the property is acquired by the Corporation before the Mine comes into production, within the meaning of subsection 1104(8.1) of the Regulations; and

(v) the property has not, before it is acquired by the Corporation, been used for any purpose whatever by any person with whom the Corporation was not dealing at arm's length.

C. For the purposes of subsection 1101(4e) of the Regulations, depreciable property described in Ruling B above will be considered to be acquired by the Corporation for the purposes of gaining or producing income from the Mine.

D. Paragraph 1100(1)(y.1) will apply to the Corporation in respect of property to which Ruling C above applies.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002 and are binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX .

The above rulings are based on the Act in its present form and, except where specific reference is made to proposed amendments to the Act or the Regulations, do not take into account any such amendments which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

Although we received, for review, certain documents relating to the proposed transaction, our rulings are based solely on the representations contained in paragraphs 1 to 25 above.

Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications relating to the facts or proposed transaction. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly:

(a) the reasonableness of any expenditures referred to in this letter;

(b) the deductibility of any expenditures referred to in this letter, other than as described in the rulings given;

(c) the determination of the fair market value or the capital cost of any property referred to in this letter;

(d) that any specific property that is a depreciable property, such as any particular pipeline or flowline, will be a property described in Class 41.1; or

(e) that any proposed expansion of the Project to increase the capacity of the Mine beyond XXXXXXXXXX bpd will be part of the Mine.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch