Subsection 66.4(5) - Definitions
Mr. A, a U.S. resident, grants the right to drill for or take the oil & gas from his Canadian freehold property to a Canadian company, in consideration for an upfront bonus of $100,000, and annual royalties payable out of any oil & gas production. The fair market value of this royalty right is $300,000.
When Mr. A acquired Canadian resource property (i.e. the royalty rights), their fair market value (of $300,000) was added to his cumulative Canadian oil and gas property expense ("CCOGPE") pool under variable A. However, the proceeds of disposition (i.e., $100,000 + $300,000) of the CRP (i.e. the drilling etc. rights given to the Canadian company) were subtracted from his CCOGPE pool under variable F. "Since the $300,000 is both added and subtracted from the CCOGPE pool, in effect, a formal valuation of the right is not required."
|Locations of other summaries||Wordcount|
|Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(iii.1)||negative CCDE pool for non-resident individual||176|
|Tax Topics - Income Tax Regulations - Regulation 805||application to resource royalties||252|
|Tax Topics - Treaties - Income Tax Conventions - Article 12||non-application of Art. 12 of US Treaty to resource royalties||142|
|Tax Topics - Treaties - Income Tax Conventions - Article 6||negative CCDE gain from grant of oil and gas royalty not exempt under US Treaty||180|
The taxpayer inherited subsurface exploration rights from his father with a deemed cost under s. 70(5.2) equal to their fair market value, and leased those rights to a corporation for a lump sum. CRA stated:
[I]n a typical petroleum and natural gas lease, the lessor grants the oil and gas company the exclusive right to explore for, drill for and take the petroleum, natural gas and related hydrocarbons that occur on or under a particular parcel of land in return for consideration consisting of lump sum rental payments and bonus payments. Since a CRP [Canadian resource property] is defined as including any right, licence or privilege to explore for, drill for or take petroleum, natural gas or related hydrocarbons in Canada, we believe that the consideration received by the lessor for entering into such a lease should be treated as proceeds of disposition of a CRP.