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: tax treatment of amounts received as consideration for entering into a petroleum and natural gas lease
Position: disposition of Canadian resource property that should be credited to taxpayer's CCOGPE account
Reasons: review of terms of lease and relevant legislation
March 28, 2006
XXXXXXXXXX HEADQUARTERS
Technical Advisor Income Tax Rulings Directorate
Verification and Enforcement Ted Harris
XXXXXXXXXX Tax Services Office (613) 957-2114
2006-017236
Petroleum and Natural Gas Lease
We are writing in response to your memorandum of February 17, 2006 wherein you requested our interpretation as to the tax treatment for a "bonus" payment and a lump sum rental received in respect of a petroleum and natural gas lease (the "PNG Lease"). In this regard, you have provided us with a copy of the relevant PNG Lease dated XXXXXXXXXX.
Based upon your review, you believe that the bonus and lump sum rental should be treated as proceeds of disposition of a "Canadian resource property" as defined in subsection 66(15) of the Income Tax Act (the "Act"), rather than as rental income.
Facts
According to the PNG Lease, the lessor is the owner of the "leased substances (as hereinafter defined) within, upon or under that certain parcel or tract of land legally described as follows:
XXXXXXXXXX..."
Pursuant to paragraph XXXXXXXXXX of the PNG Lease, "XXXXXXXXXX".
Under the terms of the PNG Lease, for the consideration specified therein the lessor has, inter alia, granted and leased exclusively unto the lessee all the leased substances, subject to the royalties reserved, as well as additional rights including "XXXXXXXXXX".
The term of the PNG Lease is for XXXXXXXXXX years and continues so long as operations are conducted on the subject lands. Other than any royalties payable in respect of any leased substances produced, the PNG Lease does not contemplate any periodic payments to the lessor during the initial term of the PNG Lease. All consideration for entering into the PNG Lease was payable to the lessor within XXXXXXXXXX days of the date thereof.
Canadian resource property is defined in subsection 66(15) of the Act as including any right, licence or privilege to explore for, drill for or take petroleum, natural gas or related hydrocarbons in Canada. As the property that is the subject of the PNG Lease is described as "all mines and minerals" in the subject land and the lessor has specifically granted to the lessee "the exclusive right and privilege to explore for, drill for, ... leased substances" which is defined to include "all petroleum, natural gas and related hydrocarbons", we believe that the consideration received by the lessor for entering into the PNG Lease (i.e. the bonus and lump sum rental payments) represent amounts received by the lessor in respect of the disposition of a Canadian resource property. Since the Canadian resource property in question consists of oil and gas rights, these proceeds should be deducted from the taxpayer's cumulative Canadian oil and gas property expense ("CCOGPE") as defined in subsection 66.4(5) of the Act pursuant to element F of that definition.
In the event that the amount in a taxpayer's CCOGPE pool is negative at the end of a taxation year, such negative amount is deducted from the taxpayer's cumulative Canadian development expense ("CCDE"), as defined in subsection 66.2(5) of the Act, by virtue of element L thereof. If the taxpayer's CCDE account is also negative at the end of the taxation year, this negative amount must be included in the taxpayer's income for the taxation year through the operation of subsection 66.2(1) and paragraph 59(3.2)(c) of the Act. This treatment is described in paragraph 2 of Interpretation Bulletin IT-125R4 Dispositions of Resource Properties.
Where a taxpayer does not have any balance in either the CCOGPE or CCDE pools because the taxpayer has not previously incurred any Canadian oil and gas property expense or Canadian development expense as defined in subsections 66.4(5) and 66.2(5), respectively, of the Act, the full amount of the payments receivable by the taxpayer for entering into the PNG Lease (i.e. the bonus and lump sum rental payments) should be included in computing the taxpayer's income for the year under paragraph 59(3.2)(c) of the Act.
We trust that these comments will be of assistance.
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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