22 December 1981 Income Tax Severed Letter

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.

G.R. White Tel. (613) 593-6201

DEC 22 1981

Dear Sirs

Re: Processing of Tailings

This is in reply to your letter of June 17, 1981 in which you request an interpretation of the income tax treatment applicable to income derived from the processing of tailings accumulated from the operation of a now defunct gold mine by parties other than the owner of the mine. In the situation you describe, a corporation (operator) obtains the right to process the tailings (and ownership of the processed product), in consideration for a cash payment and an interest in the processed product (or cash equivalent to the value of the agreed percentage of the processed product) taken back by the owner of the mine.

You point out that the processing of tailings is almost without exception subject to provincial mining taxes, and that almost without exception no deduction is allowed for these purposes to an operator for royalties payable to the original owners of the mineral rights. In your view it follows that the full amount of the income derived from the processing of tailings is subject to provincial mining taxes. For the purposes of this letter we have assumed that the operator is liable to pay the provincial mining taxes in respect of the income derived from the processing.

Under these circumstances, you have requested our opinion on whether:

(a) the right sold by the original owner to the operator is a Canadian resource property as defined in subsection 66(15)(c) of the Act and

(b) the interest in the processed product which forms part of the consideration taken back by the owner of the mine represents a source of resource profits to it, under Income Tax Regulation 1204(1)(b)(iii) or (b.1).

Canadian Resource Property

In our opinion, the rights sold by the owner to the operator may not be characterized as a Canadian resource property as defined in paragraph 66(15)(c) of the Act. In our view, a tailings accumulation is not deposited by a natural process and is not a mineral deposit. It is our view that what has been disposed of by the owner of the mine and acquired by the operator is an inventory of partially processed ore. We have read the Ontario case to which you refer (Mastermet Cobalt Mines Ltd. High Court of Justice, October 19, 1977) which holds that the ownership of tailings resides with the owner of the "rights to take". The definition of Canadian resource property in clause 66(15)(c)(ii)(B) and subparagraphs 66(15)(c)(v) and (vi) of the Act, is, however, limited to rights to explore or mine for minerals in a "mineral resource", rentals or royalties computed by reference to production from a "mineral resource" and land where the principal value thereof is its "mineral resource" content. The definition of a mineral resource in subsection 248(1) of the Act specifies that a mineral resource is a deposit such as, "a base or precious metal deposit, coal deposit, mineral deposit, etc." The word deposit in this context is not defined in the Act, but the dictionary definition is "something laid down; especially matter deposited by a natural process". This is the interpretation which we place on the word deposit.

Resource Profits

In our opinion, amounts paid to the original owner in respect of his interest in the processed product do not constitute "resource profits" to the original owner under Regulation 1204(1)(b)(iii) or (iv) or under Regulation 1204(1)(b.1).

In the case of Regulation 1204(1)(b)(iii), and (iv) a taxpayer must derive income from the processing of ore. In our view, the receipt by the owner of the mine of a percentage of the processed product (or cash equivalent) may not be characterized as income derived from the processing of ore. The receipt is merely proceeds of disposition of the inventory of tailings. The operator would, however, meet the criterion in Regulation 1204(1)(b)(iii), on the assumption that the tailings in question constitute "ore" as defined in Regulation 1206(1).

In the case of Regulation 1204(1)(b.1), the income must be received "in respect of a rental or royalty computed by reference to the amount or value of production from a mineral resource in Canada from which a person had a right to take or remove metals or minerals". The processing of the tailings does not in our view constitute production from a mineral resource in the context of Regulation 1204.

We agree that the provincial mining tax paid by the operator would not be disallowed under paragraph 18(1)(m) of the Act. However, on the assumption that the mining taxes in question are taxes on income, a deduction of such taxes would be denied by virtue of paragraph 18(1)(a) of the Act, and, in our opinion, such taxes would not qualify under paragraph 20(1)(v) of the Act (Regulation 3900) for a deduction in respect of mining operations. In Regulation 3900 "Minerals" is defined to mean minerals other than minerals obtained from a mineral resource. In this case, the gold ore was originally obtained from a mineral resource, and the processing thereof would therefore not qualify as mining operations. This accords with our comments above in respect of Regulation 1204(1)(b)(iii) and (iv), that the gold ore was from a mineral resource originally and may qualify as "ore from mineral resources in Canada".

Yours truly,

for Director General Corporate Rulings Directorate Legislation Branch

GRW/lc