24 February 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 613-995-0054

February 24, 1981

Dear Sirs:

Re: Processing of Tailings

This is in reply to your letter of November 27, 1980 in which you request our interpretation of whether or not the further processing of mill tailings is the processing of ore from a mineral resource. In this connection, we understand that you have reviewed the case of Baroid of Canada Limited vs. M.N.R. (72 DTC 1532), and because it deals with the question in the context of the pre-1972 Act and also because of the brief reason given for the finding of the Tax Review Board you are not convinced that this is determinative of the question.

You advise that the project in respect of which this question arises will not involve the incurring of significant amounts of Canadian exploration or Canadian development expense, however, the issue is material in connection with the taxpayer's entitlement to claim depletion on the profits generated from the processing of the tailings pursuant to Regulation 1204(b)(iii), which provision contemplates the processing of ore from a mineral resource not operated by the taxpayer.

It is your view that the processing of tailings is in fact the processing of ore from a mineral resource because either the tailings themselves are a mineral resource or the deposit from which the tailings were initially drawn is a mineral resource. You are also of the view that the proper capital cost allowance classification of the processing and other assets that would be acquired in connection with the development and processing of the tailings would be Class 28 of Schedule II to the Income Tax Regulations.

RESOURCE PROFITS

It is our opinion that the tailings dump may constitute partially processed ore, as defined in subsection 1206(1) of the Income Tax Regulations, i.e., "Ore" includes ore from a mineral resource that has been processed to any stage that is prior to the prime metal stage or its equivalent. If so, the further processing of the ore stockpile fulfills the requirements of Regulation 1204 by generating profits which are termed resource profits from which earned depletion may be deducted, pursuant to Regulation 1201.

However, although the taxpayer may be processing ore from a mineral resource, the tailings dump, in our opinion, is not in itself a mineral resource, within the meaning of subsection 248(1) of the Act.

CLASS 28

We do not agree that the proper capital cost allowance classification of the processing and other assets acquired in this connection would be Class 28. Such property must, by definition, be acquired by an operator of one or more mines principally for the purpose of gaining or producing income from those mines, and such property should have been acquired before the mine came into production in reasonable commercial quantities. In our view, in your situation the taxpayer is not operating a mine and does not meet the requirements of the class.

EARNED DEPLETION BASE

Under Regulation 1205(b), all expenditures incurred after May 8, 1972, each of which was the capital cost of property included in Class 10(k) of Schedule II to the Regulations and not used for any purpose whatever by any person with whom the taxpayer did not deal at arm's length, and which property was acquired for the purpose of processing in Canada ore, after extraction from a mineral resource to any stage that is not beyond the prime metal stage or its equivalent, would qualify for inclusion in the earned depletion base.

Class 10(k) of Schedule II to the Income Tax Regulations describes property that was acquired for the purpose of gaining or producing income from a mine. Pursuant to Regulation 1104(6) for the purposes of Class 10 of Schedule II, "income from a mine" includes income reasonably attributable to the processing of mineral ores from a mineral resource not owned by the taxpayer to any stage that is not beyond the prime metal stage or its equivalent.

Accordingly, the capital cost of depreciable property described in Regulation 1205(b), acquired for use in the processing of tailings, may earn depletion. Regulation 1205(a)(iv) would not be applicable because that provision requires equipment having been acquired principally for the purpose of the processing in Canada of ore from a "qualified resource." A qualified resource is by definition a mineral resource that came into production in reasonable commercial quantities within a reasonable time after the processing property was acquired by the taxpayer, and the tailings dump does not so qualify.

We trust that the above is the information which you require. The general nature of the factual background supplied has necessitated an answer of a general nature only and one which is not binding on the Department.

Yours truly,

for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch