27 October 2010 External T.I. 2010-0375471E5 - Alberta Freehold mineral rights tax

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. is the tax paid by an individual deductible & if so, where on the T1

Position: 1. if not reimbursed - the tax is deductible- form T1229 part III to line 224 on the T1 return.

Reasons: 1. 18(1)(a) & 18(1)(m)

XXXXXXXXXX
									2010-037547
									Lena Holloway, CA
									613-946-3553

October 27, 2010

Dear XXXXXXXXXX :

Re: Alberta Freehold Mineral Rights Tax

We are writing in response to your correspondence of July 20, 2010 wherein you enquired about the deductibility of "Freehold Mineral Rights Tax" payments made by an individual to the Province of Alberta. Specifically, you asked whether such payments were allowable deductions on an individuals' T1 return, and if so, the specific line number on the T1 that would be applicable.

Except as otherwise noted, all statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.

Background

It is our understanding that the petroleum and natural gas mineral rights owned by the Province of Alberta cover approximately 81 percent of the land area of Alberta. The remaining 19% are freehold petroleum and natural gas mineral rights owned by private individuals and companies or rights owned by the federal government. The freehold mineral rights owners are subject to the Freehold Mineral Rights Tax pursuant to the Freehold Mineral Rights Tax Act (Province of Alberta) on revenue derived from freehold petroleum and natural gas properties. The assessment is calculated annually in February based on the previous calendar year wellhead production of petroleum and natural gas. This tax is levied by the Province of Alberta on each owner of a petroleum or natural gas mineral right as shown on the estate fee simple Certificate of Title and is due March 25. (information source:ww.energy.gov.ab.ca/Tenure/908.asp).

Our Comments

Written confirmation of the consequences inherent in particular transactions are given by the Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5. Notwithstanding the foregoing, we are providing the following general comments.

In general, paragraph 18(1)(a) provides that no outlay or expense is deductible in computing the income of a taxpayer from a business or property, unless it was made or incurred for the purpose of gaining or producing income. Although this provision is very broad, jurisprudence has held that income taxes are not laid out for the purpose of earning income; rather they are taxes on that income and therefore are not deductible. As the Freehold Mineral Rights Tax is levied by the Province of Alberta on production, not profits, paragraph 18(1)(a) would not apply to prohibit deductibility. Consequently, freehold mineral rights owners may be entitled to deduct these amounts in computing income under section 9, provided that such tax is not reimbursed to them by any person(s).

We note that there is no specific freehold mineral tax deduction line on the T1 income tax return. The line "Other expenses (e.g. Crown charges)" in Part III on schedule T1229 (Statement of Resource Expenses and Depletion Allowance) may be used to claim the appropriate deduction. The amount on the line "Total exploration and development expenses" in Part III of schedule T1229 would then be entered on line 224 of the T1 income tax return.

We trust the above comments are of assistance.

Yours truly,

Fiona Harrison, C.A.
Manager
Resources Industry Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislation, Policy and Regulatory Affairs Branch