2011 Ruling 2009-0307841R3 - 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: (1) Whether all of the XXXXXXXXXX wells of phase I of the project constitute one mine and the XXXXXXXXXX wells for phase II constitute an expansion of the mine. (2) Whether depreciable property to be used in the project is property described in Class 41.

Position: (1)Yes (2) depreciable property for phase I is eligible for inclusion in Class 41 and accelerated CCA, while depreciable property of phase II is not grandfathered and will be included in new Class 41.1 such that accelerated CCA will be phased out as provided in paragraph 1000(1)(y.1).

Reasons: (1) Opinion received from NRCan (2) review of documentation submitted

XXXXXXXXXX
									2009-030784
									XXXXXXXXXX 

XXXXXXXXXX , 2011

Dear XXXXXXXXXX :

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-noted parties. We also acknowledge receipt of your additional correspondence, including various electronic messages, in respect of this ruling.

To the best of your knowledge and that of the taxpayer, none of the issues contained herein:

(i) is in an earlier return of the taxpayer or a related person ;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

(iv) is before the courts ; or

(v) is the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate.

However, the taxpayer has advised us that capital expenditures were being incurred for the project as the facilities were being constructed and these expenditures have been included in Class 41.

DEFINITIONS

1. Unless otherwise indicated, in this ruling request:

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

"Amalco" means XXXXXXXXXX as it existed prior to the amalgamation described in Paragraph 2;

"BCo" means XXXXXXXXXX ;

"CCo" means XXXXXXXXXX ;

"BIN" means Business Identification Number;

"bituminous sands" has the meaning assigned in subsection 248(1) of the Act;

"bpd" means barrels of oil per day;

"Camp" refers to XXXXXXXXXX camp to house the construction and operations workforce of Phases I and II to be located at XXXXXXXXXX .

"Central Plant" has the meaning assigned in paragraph 22;

"Class 41 Property" means depreciable property of Class 41 of Schedule II of the Regulations;

"Completion" has the meaning assigned in subsection 1104(2) of the Regulations;

"Corporation" means XXXXXXXXXX ;

"Injection Well" means the upper well of a XXXXXXXXXX well pair;

"Partnership" means XXXXXXXXXX ;

"Predecessor 1" means XXXXXXXXXX ;

"Phase I" includes the Phase 1AXXXXXXXXXX and the Phase 1BXXXXXXXXXX stages;

"Phase I Well Pairs" has the meaning assigned by paragraph 18 below;

"Predecessor 2" means XXXXXXXXXX ;

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

"Project" means the in-situ bitumen recovery project of the Partnership as described in this ruling;

"Project Lands" constitute XXXXXXXXXX townships of oil sands leases in XXXXXXXXXX . The oil sands leases are not contiguous and fall within the XXXXXXXXXX .

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

"Regulator" means the XXXXXXXXXX ;

XXXXXXXXXX ;

"Specified Oil Sands Property" has the meaning assigned in subsection 1104(2) of the Regulations;

"SubCo B" means XXXXXXXXXX ; and

"taxable Canadian corporation" has the meaning assigned in subsection 89(1) of the Act.

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

Facts

Background - Corporation and Partnership

1. The Corporation is a taxable Canadian corporation and a private corporation. The Corporation is a subsidiary of XXXXXXXXXX , a non-resident corporation, and an indirect subsidiary of XXXXXXXXXX , a corporation resident in XXXXXXXXXX . The Corporation files its income tax returns at the XXXXXXXXXX Tax Centre and is serviced by the XXXXXXXXXX Tax Services Office. The Corporation's taxation year for purposes of the Act ends on XXXXXXXXXX . The Corporation's BIN is XXXXXXXXXX .

2. The Corporation was formed as a result of the amalgamation on XXXXXXXXXX of Amalco and CCo, a taxable Canadian corporation involved in XXXXXXXXXX .

3. Amalco was formed through a series of transactions whereby BCo, a taxable Canadian corporation, acquired all of the issued and outstanding shares of SubCo B and amalgamated with SubCo B on XXXXXXXXXX .

4. SubCo B was a taxable Canadian corporation initially formed by an amalgamation of Predecessor 1 and Predecessor 2 on XXXXXXXXXX . Predecessor 1 and Predecessor 2 were taxable Canadian corporations. Predecessor 1 had acquired all of the issued and outstanding shares of Predecessor 2 on XXXXXXXXXX .

5. The Partnership is a general partnership formed under XXXXXXXXXX law on XXXXXXXXXX . The Partnership files its information returns with the XXXXXXXXXX and is serviced by the XXXXXXXXXX Tax Services Office. The Partnership's fiscal period for purposes of the Act ends on XXXXXXXXXX . The Partnership's BIN is XXXXXXXXXX .

6. Predecessor 2 initially owned a XXXXXXXXXX % interest in the Partnership. Following the restructuring described in paragraph 3, the Corporation became the owner of a XXXXXXXXXX % interest in the Partnership. As at XXXXXXXXXX , the Corporation owned a XXXXXXXXXX % interest in the Partnership, while the remaining XXXXXXXXXX % interest of the Partnership was held by XXXXXXXXXX , a wholly-owned subsidiary of the Corporation.

7. On XXXXXXXXXX , the Corporation, together with its subsidiary XXXXXXXXXX , sold a XXXXXXXXXX % interest in the Partnership to XXXXXXXXXX effective XXXXXXXXXX . XXXXXXXXXX is an indirect subsidiary of
XXXXXXXXXX , the shares of which are listed on the XXXXXXXXXX . Following this sale, the Corporation owns a XXXXXXXXXX % interest in the Partnership and XXXXXXXXXX owns the remaining XXXXXXXXXX % interest.

8. As a result of the restructuring described in paragraph 3, the Corporation also owns a XXXXXXXXXX % interest inXXXXXXXXXX as well as aXXXXXXXXXX % interest inXXXXXXXXXX .

The Project Lands and Development Areas

9. The leases for the Project Lands were initially acquired by Predecessor 2 from the Province of XXXXXXXXXX and were subsequently transferred to the Partnership, which is now the sole owner of all the leases with the exception of XXXXXXXXXX sections. In general, oil sands leases grant rights to take oil sands substances from the leased land. The Mines and Minerals Act (XXXXXXXXXX ), pursuant to which the oil sands leases are granted, defines oil sands as

(a) sands and other rock materials containing crude bitumen,

(b) the crude bitumen contained in those sands and other rock materials, and

(c) any other mineral substances, in association with that crude bitumen or the sands and other rock materials referred to in subclauses (i) and (ii).

The Project will be developed to produce approximately XXXXXXXXXX bpd in the following phases, which are distributed over the oil sands leases situated in XXXXXXXXXX development areas - XXXXXXXXXX :

Phase		Area	Title			Capacity  	Expected
First
 						(bpd)		Steam date
IA		XXXXX	XXXXX			XXXXX		XXXXX
IB		XXXXX	XXXXX			XXXXX		XXXXX
II		XXXXX	XXXXX			XXXXX		XXXXX
III		XXXXX	XXXXX			XXXXX		XXXXX
IV		XXXXX	XXXXX			XXXXX		XXXXX
V 		XXXXX	XXXXX			XXXXX		XXXXX
VI 		XXXXX	XXXXX			XXXXX		XXXXX

The application for the XXXXXXXXXX stage of Phase IA was made to the Regulator on XXXXXXXXXX and was approved by it on XXXXXXXXXX .

An application for Phases IB, II and III was made to the Regulator in XXXXXXXXXX and on XXXXXXXXXX the Regulator approved these applications. Although the application and approval for Phase III relates to production of XXXXXXXXXX bpd, an amendment of the regulatory approval to increase production to XXXXXXXXXX bpd will be sought. Amendment applications for Phases IV to VI will be the subject of future submissions. The steam date for all the phases has been delayed. Phase I commenced steaming in XXXXXXXXXX .

Area History

10. XXXXXXXXXX

11. XXXXXXXXXX

Project

12. There has been no development of the oil sands resource on the Project Lands other than those described in this letter.

13. Within the Project Lands, the overburden thickness to the bitumen bearing resource is approximately XXXXXXXXXX meters with bitumen bearing thickness ranging from XXXXXXXXXX meters to XXXXXXXXXX meters. Surface mining on the Project Lands is not an alternative for resource recovery. The Project phases will recover bitumen from XXXXXXXXXX using horizontal well pairs and XXXXXXXXXX technology.

14. XXXXXXXXXX involves drilling pairs of horizontal wells. The upper wells are the steam injection wells and the lower wells, approximately XXXXXXXXXX meters below the injection wells, near the base of the oil pay zone, are completed as bitumen production wells. Steam will be continuously injected through the upper well bores to create steam chambers, which heat the formation. The heated bitumen, under the influence of gravity, then drains to the lower horizontal wells and is produced to the surface.

15. XXXXXXXXXX technology results in the recovery of XXXXXXXXXX % or more of the oil in place.

Geological work and wells drilled

16. As of XXXXXXXXXX , the following work had been undertaken:

• XXXXXXXXXX corehole wells, XXXXXXXXXX observation wells, XXXXXXXXXX gas wells and XXXXXXXXXX source water wells have been drilled and extensive XXXXXXXXXX seismic programs covering the XXXXXXXXXX had been completed. Core hole drilling will continue on an annual basis to further delineate the XXXXXXXXXX and identify horizontal well locations to expand the Project;
• XXXXXXXXXX corehole wells, XXXXXXXXXX observation wells, XXXXXXXXXX gas wells and XXXXXXXXXX water source well had been drilled on XXXXXXXXXX lands and extensive XXXXXXXXXX seismic programs covering the XXXXXXXXXX lands had also been completed; and
• XXXXXXXXXX corehole wells, XXXXXXXXXX observation wells and XXXXXXXXXX gas wells had been drilled on the XXXXXXXXXX lands and extensive XXXXXXXXXX seismic programs covering the XXXXXXXXXX lands had also been completed.

17. All of the corehole wells have been abandoned. The gas, source water and observation wells have been cased. Observation wells have drilled to monitor temperature and pressure levels in the project area.

Phase I

18. On XXXXXXXXXX , Predecessor 2 submitted an application to the Regulator to drill XXXXXXXXXX well pairs for the XXXXXXXXXX referred to in paragraph 9 above (the "Phase I Well Pairs"). Approval No.XXXXXXXXXX was granted by the Regulator on XXXXXXXXXX stipulating that production from the Phase I Well Pairs not exceed XXXXXXXXXX cubic metres per day (XXXXXXXXXX bdp) on an annual average basis. Amendment applications were filed on XXXXXXXXXX to modify various technical aspects of the proposed development and increase the number of well pairs to XXXXXXXXXX . These amendments were approved on XXXXXXXXXX . Only a portion of the Phase I Well Pairs will be required to produce at the approved bitumen production rate of XXXXXXXXXX bdp; the exact number of which will be determined by reservoir and production well performance.

XXXXXXXXXX . As of XXXXXXXXXX , all XXXXXXXXXX Phase I Well Pairs had been drilled and XXXXXXXXXX of these had been completed. The remaining well pairs were completed by XXXXXXXXXX .

19. In XXXXXXXXXX , another application (the "XXXXXXXXXX Application") was submitted to increase production from the Phase I Well Pairs to XXXXXXXXXX bpd. The production and treating processes, as well as water treatment equipment, for the additional production would be the same as that needed for the XXXXXXXXXX bdp production level, with the exception of an additional treater, saline water source wells, a saline water tank, pumps, a heat exchanger and associated piping.

20. When the XXXXXXXXXX Application was approved on XXXXXXXXXX , all of the XXXXXXXXXX well pairs had been drilled from XXXXXXXXXX surface pads.

Proposed Transactions

21. To optimize the use of steam and underground steam flow, Phase I will develop the resource on the XXXXXXXXXX as one integrated unit.

22. The required steam will be generated by a central plant (the "Central Plant"). Processing equipment, including produced water recycling facilities, slop treating facilities and a vapour recovery unit, are being constructed as part of the Central Plant site .

23. Phase I Well Pairs will have one steam line from the Central Plant supplying the steam and will have one line to bring the produced fluids from the wells to the Central Plant for processing.

24. In addition to the horizontal wells, surface facilities will be required to generate and distribute steam, generate power, gather well production, process oil and emulsions, and treat water. Currently, facilities are under construction to produce bitumen from the Phase I Well Pairs. These facilities will form an integral part of the facilities that will produce XXXXXXXXXX bpd in Phase I.

Phase I Facilities

25. The Phase I Well Pairs wellhead and other equipment located at the pads will be connected to the Central Plant where the steam generation and production processing facilities will be located.

26. The Central Plant facilities have been designed and are being constructed with a view to tie-in and integrate production levels beyond XXXXXXXXXX bpd. At the Central Plant, steam for Phase I will be generated using recycled produced water
supplemented with blended saline and non-saline makeup water. Water for the process will be supplied from approved water source wells.

27. XXXXXXXXXX injection steam will be generated in XXXXXXXXXX MW Once-through Steam Generators ("OTSG") using treated water as the primary source of boiler feed water. A steam separator will then be used to produce dry quality steam for distribution to the well pads.

28. Produced fluids will include bitumen, condensed steam from the injection process, formation water, solution gas, and associated gas and lift gas. Inlet and bitumen treating, water de-oiling, steam generation, and lift gas compression are some of the activities that will be undertaken at the Central Plant. Tankage for diluent, diluted bitumen, and produced water will be located on site.

29. The Central Plant comprises six integrated processes:

• Produced fluids (bitumen emulsion) collection, heat recovery, water and gas separation, diluent blending and diluted bitumen cooling;
• Steam generation, blow down and disposal;
• Gas collection, cooling and fuel gas systems;
• Produced-water handling, makeup water and treatment;
• Glycol heat recovery integration and winterization; and
• Storage tanks, offsite connections, truck racks and utilities.

30. The processing facilities and systems at the Central Plant will include:

• boiler feedwater treatment;
• steam generation;
• plant inlet facilities;
• produced fluid treating system;
• produced water de-oiling, recycling and disposal facilities;
• slop treatment facilities;
• heat integration;
• fuel and produced gas gathering, processing, and distribution;
• flare system;
• tankage;
• support buildings;
• glycol cooling and heating; and
• utilities.

31. The production pads and the Central Plant will be interconnected with service corridors which will include:

• production pad access roads;
• production flow lines ancillary to the machinery and equipment;
• steam distribution flow lines ancillary to the machinery and equipment;
• lift gas flow lines; and
• electrical power distribution lines.

The service corridor infrastructure has been designed to accommodate future operations beyond XXXXXXXXXX bpd of production. Also, once full production levels are reached, the geographic area of the Project will expand as required to replace production volumes.

32. The storage tanks and utilities will include:

• All necessary tankage, including diluted bitumen sales oil storage tanks, slop tanks, produced water skim tank, boiler feed tank, and diluent tank. All tanks will have secondary containment as required by the Regulator;
• Potable and utility water;
• Domestic sewage treatment system;
• Drain system;
• Service and sanitary water;
• Industrial runoff and process water system;
• Stormwater retention facilities; and
• Sludge pond.

33. For Phase I, all electrical power will be provided by the provincial power grid. This will require construction of a substation, ancillary equipment, on-site distribution and several connections to offsite sources.

34. The Central Plant buildings will include:

• a process building;
• a produced water de-oiling building;
• a steam generation building;
• a water treatment building;
• a warehouse building;
• an administration office
• a central control room building
• a temporary construction/operations building;
• other small shelters enclosing parts of modularized equipment; and
• the Camp buildings.

A new all-weather road will be constructed from the Central Plant to access the well pads. This road network will be integrated to include the interconnect flowlines to/from the well pads and the overhead power line along the same right-of-way.

35. As of XXXXXXXXXX , the following source/disposal wells were drilled within the XXXXXXXXXX lands to meet the Phase I requirements.

XXXXXXXXXX

The above wells will have well head and other equipment, including flow lines to or from the Central Plant.

Offsite Services

36. Where practical, the Partnership intends to use or widen existing right-of-ways and/or existing cutlines to minimize environmental and timber impacts. A new all-weather road will be constructed, XXXXXXXXXX to provide access to the Central Plant.

37. At present there are plans to construct a diluent supply pipeline from XXXXXXXXXX to the XXXXXXXXXX lease and from there to the Central Plant and a bitumen blend transport pipeline from the Central Plant to the XXXXXXXXXX lease and from there to XXXXXXXXXX . At XXXXXXXXXX , bitumen blend and diluent storage tanks will also be constructed.

38. From XXXXXXXXXX , third party pipelines will be used to transport the bitumen blend to market, either through XXXXXXXXXX or XXXXXXXXXX .

Upgrader

39. The Partnership had planned to construct an upgrader at XXXXXXXXXX . Due to the current economic climate and high anticipated costs of constructing the upgrader, an application to the Regulator for the construction has been withdrawn.

Phase II (XXXXXXXXXX )

40. The XXXXXXXXXX Application, which was approved by the Regulator on XXXXXXXXXX , included an application to increase the production in the XXXXXXXXXX development area by another XXXXXXXXXX bpd, to a total of XXXXXXXXXX bpd.

41. The Phase II incremental production is to be achieved by an additional XXXXXXXXXX pads and XXXXXXXXXX wells ("Phase II Well Pairs"). It will also require additional steam generating equipment, production and water treatment equipment and processing area. This phase will also add sulphur removal equipment.

42. The location of the well pads in Phase II will be strategically located to optimize the use of the steam and its flow underground so that Phases I and II are developed as one integrated extractive unit. For example, all the steam required will be provided from the Central Plant facilities via flow lines. Other services such as production control, power etc., will also be provided from the Central Plant location. Produced fluids from all these phases will be processed at the Central Plant facilities. Produced water treatment and reuse or disposal will also occur at the Central Plant facility. Produced bitumen from these phases will be sent to XXXXXXXXXX via the pipeline referred to in paragraph 37 located at the Central Plant facilities. The infrastructure constructed will be common for both the phases.

43. The components of Phase II will be identical to those for Phase I.

Central Plant

44. Phase II Central Plant will be located adjacent to the Central Plant for Phase I and will include the following additional facilities:

• Steam generation equipment;
• Pumping equipment;
• Water treating equipment;
• Oil treating equipment;
• De-oiling equipment;
• Heat exchange equipment;
• Additional source water and disposal wells; and
• Associated flowlines to complete integration.

45. The process used will be the same for Phases I and II; i.e., bitumen treating, water recycle and OTSGs for steam production. In particular, the following components will be added for Phase II:

• XXXXXXXXXX OTSGs (XXXXXXXXXX MW, XXXXXXXXXX mmBTU/h);
• Glycol heater (XXXXXXXXXX MW);
• Sulphur plant process heater (XXXXXXXXXX MW);
• High pressure flare;
• Low pressure flare;
• Emergency power generator; and
• Additional tanks for diluted bitumen, slop, produced water, boiler feed water and diluent.

46. The XXXXXXXXXX drilling crew will be housed in an existing camp located in XXXXXXXXXX .

47. The construction and operations workforce for Phase II will also be housed at the Camp, while the drilling camp described in paragraph 46 may be used for extra capacity during construction peaks and plant turnarounds.

48. The incremental diluted bitumen from Phase II will also be transported to XXXXXXXXXX via the pipeline described in paragraph 37.

Phase III (XXXXXXXXXX )

49. As a part of the XXXXXXXXXX Application, an application was also made for the initial development of the XXXXXXXXXX oil sands lease ("Phase III") to produce XXXXXXXXXX bpd of bitumen with XXXXXXXXXX wells in XXXXXXXXXX pads. This application for Phase III was approved by the Regulator on XXXXXXXXXX ; however, an amendment to increase production of Phase III to XXXXXXXXXX bpd will be sought by the Partnership. It is anticipated that the first steam will be injected into the XXXXXXXXXX wells for Phase III in XXXXXXXXXX .

Phases IV to VI

50. Applications for the development of these phases have not been made to date and may be the subject of future ruling requests.

Additional Information

51. As at XXXXXXXXXX , XXXXXXXXXX had commenced work on a contract (# XXXXXXXXXX ) for the design, supply and installation of XXXXXXXXXX Once Through Steam Generators for Phase I that are described in paragraph 27. Copies of invoices submitted by XXXXXXXXXX up to XXXXXXXXXX indicated that XXXXXXXXXX % of the work and materials, including the completion of the convection box refractory and the radiant section refractory, had been completed to that date. A document titled the XXXXXXXXXX prepared by the engineering firm XXXXXXXXXX on XXXXXXXXXX indicates that the Phase I facilities, other than the treaters, were sized for the maximum rate of XXXXXXXXXX m3/d bitumen (i.e. greater than XXXXXXXXXX bpd production) with XXXXXXXXXX m3/d steam injection to accommodate the potential higher production rate for the XXXXXXXXXX stage.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to enable the Corporation to develop an oil production and processing facility 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 purpose of the proposed transactions, we confirm the following:

Phase I

A. For the purposes of paragraphs 1100(1)(y), subsections 1101(4c), 1102(8) and (9), section 1107 and Class 41 of Schedule II, all Phase I Well Pairs of the Project for the extraction of material from the deposit of bituminous sands in Phase I to produce up to XXXXXXXXXX bpd of bitumen 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 acquired before 2012 that is part of the Phase I Facilities described in any of paragraphs 25 through 37 above that is reasonably required for Phase I of the Project to reach Completion, and that,

(1) but for Class 41, would be included in paragraph (g), (k), (l) or (r) of Class 10; or

(2) would be included in paragraph (a) of Class 41 because of subsection 1102(9) of the Regulations provided no election is filed to include the particular property in Class 43.1 or 43.2;

will be property described in paragraph (a) of Class 41,

(3) provided that the property was acquired by the Partnership principally for the purpose of gaining or producing income from the Mine operated by the Partnership;

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

(5) the property is acquired before the Mine above comes into production, within the meaning of subsection 1104(8.1) of the Regulations;

(6) the property has not, before it was acquired by the Partnership, been used for any purpose whatever by any person who was not dealing at arm's length with the Partnership; and

(7) the property was not acquired by an expenditure in respect of which the Partnership is allowed a deduction in computing income under section 37 of the Act.

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

D. Pursuant to subsection 1104(8.1), for the purposes of Ruling B above, the Mine will be considered to come into production at the time when the Phase I Central Plant described in paragraphs 29 and 30 above commences production in reasonable commercial quantities.

Phase II

E. For the purposes of paragraphs 1100(1)(y.1), subsections 1101(4e), 1102(8) and (9), section 1107 and Class 41.1 of Schedule II, all Phase II Well Pairs of the Project for the extraction of material from the deposit of bituminous sands in Phase II to produce an additional XXXXXXXXXX bpd of bitumen are sufficiently integrated with the Mine to constitute an expansion of the Mine (the "Expansion").

F. For the purposes of clause (a.2)(ii)(C) of Class 41, the Expansion referred to in Ruling E will constitute an expansion of the Mine that has increased the greatest design capacity of the Mine measured in volume of oil that is not beyond the crude oil stage or its equivalent by not less than XXXXXXXXXX % greater than the greatest design capacity of the Mine immediately before the Expansion.

G. Depreciable property that is described in any of paragraphs 41 through 47 above that is part of the Phase II Facilities will not be specified oil sands property of the Partnership and will, therefore, be property described in Class 41.1, provided that, such property:

(1) would, but for Classes 41 and 41.1, be included in paragraph (g), (k), or (l) of Class 10; or

(2) would, but for Class 41.1, be included in paragraph (a.2) of Class 41 because of subsection 1102(9) of the Regulations provided no election is filed to include the particular property in Class 43.1 or 43.2;

and that

(3) the Mine was the subject of the Expansion as described in Ruling F;

(4) the property was acquired by the Partnership before the completion of the Expansion, and in the course of and principally for the purposes of the Expansion;

(5) the property has not, before it was acquired by the Partnership, been used for any purpose whatever by any person who was not dealing at arm's length with the Partnership; and

(6) the property was not acquired by an expenditure in respect of which the Partnership is allowed a deduction in computing income under section 37 of the Act.

H. Paragraph 1100(1)(y.1) will apply to the Partnership in respect of property to which Ruling G 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 do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

COMMENTS

Although we have received, for review, various documents relating to the proposed transactions, our rulings are based solely on the representations described herein.

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

(a) that any specific property, such as any particular pipeline or flowline, may be included in paragraph (a) of Class 41 for the purposes of Rulings B and G above;

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

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

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

(e) that any proposed expansion of the Project to increase the capacity of the Mine beyond XXXXXXXXXX barrels per day or the additional Phases III to VI of the Project will be part of the Mine determined in Ruling A above.

B. For the purposes of Rulings B and D above, the Mine will be considered to have come into "production in reasonable commercial quantities" for the purposes of subsection 1104(8.1) of the Regulations on the first day of the 90 day period during which the Central Plant described in paragraphs 29 and 30 operates continuously to produce XXXXXXXXXX bpd (i.e. XXXXXXXXXX % of XXXXXXXXXX bpd production target for Phase I).

Yours truly,

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