9 May 1990 Income Tax Severed Letter 900480 - Sources of income and Resource Profits

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.

TO S.G. McKenzie Chief of Audit Vancouver District Office Audit Review Section 148-13

Attention: J.C. Fitz-Clarke

FROM Head Office Resource Industries Section Frank Gillman (613) 957-9768

We have been requested by the Oil and Gas Industry specialist of the Calgary D.O. to respond to your memo addressed to them dated April 9, 1990, wherein you requested whether for the purpose of calculating "resource profits", the income from operating mines is reduced by certain costs incurred (i.e. depreciation and/or non- capital costs) prior to the commencement of production from a particular mine. It is our understanding that you require an answer to this for a round table session to be held in early May which will be attended by you and representatives of a joint legal and B.C. chartered accountants tax committee.

More specifically, their question to you is as follows:

10. LOSSES FROM MINERAL PRODUCTION

The following extract is from the Canadian Petroleum Tax Journal Vol. 2, No. 2, and is a written response by Revenue Canada officials to a question posed at the Annual Spring Conference of the Canadian Petroleum Tax Society held in Calgary, Alberta on May 16, 1989.

Question

21. When a taxpayer receives take-or-pay proceeds, the proceeds are included in income under paragraph 12(1)(a), with a corresponding reserve available under paragraph 20(1)(m). If the taxpayer decides not to claim the paragraph 20(1)(m) reserve, is the income that is included under paragraph 12(1)(a) considered to be resource income eligible for the resource allowances deduction?

Answer

21. In order for an amount to be included in resource profits for purposes of Regulation 1204(1);

(a) There must be production of natural gas from gas wells operated by the taxpayer,

(b) There must be income for the year from that production,

(c) The amount of income from that source must be computed in accordance with the Act, AND

(d) The computation of income must take into account such other deductions for the year as may reasonably be regarded as applicable to that source of income per Regulation 1204(1)(f).

You cannot have income from the production of gas in advance of that production. So the income "source" per paragraph 12(1)(a) is the taxpayers business income, but it is not income from the production of natural gas, etc. However, income for the current year relating to production which had been produced in a previous year (e.g. a price adjustment) should be included in computing resource profits for the current year even if there is no production in the year.

Amounts included in income by paragraph 12(1) (e) in respect of the previous year's 20(1)(m) reserve gas to be delivered, are attributable to a source that is production to the extent that the relevant quantity of gas is produced in that year, or has been produced in a previous year (i.e., not delivered until a year subsequent to production). Any 20(1)(m) reserve for produced, but undelivered gas, is applicable to production income for that year, and should be deducted in computing resource profits pursuant to Regulation 1204(1)(f). Once delivery has been made, there is no reserve, and the entire previous year's reserve would be income eligible for the resource allowance.

The answer given by Revenue Canada suggests that there can be no losses from the production of minerals in advance of that production. Therefore, where costs (depreciable property and non-capital) are incurred prior to the commencement of production from a mine, it would appear that the CCA and non- capital costs are not included in the amount determined under paragraph 1204(1)(c) and therefore do not reduce the income from operating mines for the purposes of calculating "resource profits". Please comment.

Our response to the above question is as follows:

We do not share your view that where costs such as capital cost allowance (CCA) and non-capital costs are incurred prior to the commencement of production from a mine that such CCA and non- capital costs are not to be included in the amount determined under paragraph 1204(1)(c) and do not reduce income from operating mines for purposes of calculating "resource profits".

It has always been the Department's view that the reference in paragraph 1204(1)(c) of the Regulations to "sources [of income] described in paragraph (b)" does not require that there be income generated in a particular taxation year in order for deductions of capital cost allowance and non-capital costs to be referrable to a source of income. A taxpayer's incomes for the year and losses for the year derived from all operations described in paragraph 1204(1)(b) of the Regulations are aggregated in computing the taxpayer's resource profits.

Chief Resource Industries Section Bilingual Services & Resource Industries Division Rulings Directorate c.c. John Kurrant