11 January 1989 Income Tax Severed Letter 5-7239 - [890111]

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.

P. Mason (613) 957-4364

January 11, 1989

Dear Sirs:

We are writing in response to your request dated December 13, 1988. In that request you asked us to confirm that if the terms of B.C. legislation, that is yet to be drafted, were consistent with the attached "Proposed Structure of Company-Specific Reclamation Funds" proposal, payments to the mine-specific Funds described therein would be deductible from taxable income. In the alternative, you asked for a written discussion as to why such payments would not be deductible and a description of what specific modifications to the proposal would be necessary for such payments to become deductible.

We are unable to comply with your request, since adequate information relative to the operation of the Funds was not included in your Proposal; however, we can provide the following comments and observations based on our review of the provisions of the Income Tax Act (the "Act") that appear to be relevant to this type of situation.

In items 6(b) and (c) of the principles and structure of the fund you state that, "If this option is selected, the operator forfeits any claim on the Fund", and "Successful performance of the work will allow the operator to claim the difference between the amount that is required to be in the Fund (to cover expected future costs) and the amount that is actually in the Fund".

Both of these comments suggest to us that payments to the fund would not be deductible, pursuant to paragraph 18(l)(e) of the Act. This provision provides that"... no deduction shall be made in respect of ... 18(1)(e) an amount as, or on account of, a reserve, a contingent liability or amount or a sinking fund..."

To the extent the quoted statements from items 6(b) and (c) of the principles and structure of the fund suggest that the operator has not parted irrevocably with the amounts paid into the fund, it appears to us that the operator has simply made a deposit, the deduction of which would be disallowed as not being an expense pursuant to Section 9. This view is consistent with the view of the department relative to the road Sand and Gravel Limited case (87 DTC 5343) which is being appealed by the department. Even if the amounts paid into the Fund could be demonstrated to represent the future costs of mine reclamation, it is our view that the provisions for such future costs would be disallowed as a reserve pursuant to paragraph 18(1)(e) of the Act. This position is consistent with the decision of the Federal Court of Appeal in the case of Burnco Industries Ltd. et al (1984 DTC 6348). In summary, the ability of the operator to obtain a refund of the amount paid into the fund, in our view would make the payments non-deductible.

If the amounts were not refundable to the operator, payments could still be non-deductible pursuant to the provisions of paragraph 18(1)(m) of the Act. Paragraph 18(1)(m) provides that "... no deduction shall be made in respect of ... any amount ... paid or payable by virtue of an obligation imposed by statute ... to

(i) Her Majesty in right of ... a province,

(ii) an agent of Her Majesty in right of... a province, or

(iii) a corporation, commission or association that is controlled by Her Majesty in right of.. a province or by an agent of Her Majesty in right of.. a province

as a royalty, tax..., lease rental or bonus or as an amount, however, described, that may reasonably be regarded as being in lieu of any such amount, and that may reasonably be regarded as being in relation to

(iv) the acquisition, development or ownership of a Canadian resource property, or

(v) the production in Canada of...

(B) metal or minerals... from a mineral resource in Canada...'

In order to be deductible, paragraph 18(1)(m) notwithstanding therefore, payments to the funds would need to be something other than disguised royalties, taxes, lease rentals or bonuses. Since your submission suggests these payments will be made in advance of production, they have some similarity to bonuses. Similarly, if the payments were based or computed based on production or expected production, they would have some similarity to royalties, taxes, lease rental. In the absence of the draft legislation establishing the funds in question, we are unable to comment more fully relative to the possible application of paragraph 18(1)(m).

If we may be of further assistance, please do not hesitate to contact us again.

Yours truly,

for Director Bilingual Services and Resource Industries Division Rulings Directorate