Regulation 1204 - Resource Profits

Subsection 1204(1)


3850625 Canada Inc. v. The Queen, 2010 DTC 1089 [at 2976], 2010 TCC 104, aff'd 2011 DTC 5062 [at 5714], 2011 FCA 117

Woods J. found that the taxpayer could include interest from its tax refund in the calculation of its gross resource profits, given that the interest was sufficiently connected with the taxpayer's coal business. She stated at para. 21:

[T]he appellant's right to refund interest arose in the course of managing its tax obligations. These obligations, in turn, arose as a consequence of earning profits from the production and processing of coal. There is no other significant source of income on which the tax is payable.

And at para. 27:

It is also useful to look at the nature of the issues in the tax dispute that led to the refund, namely, the issues on which the appellant was successful. If the factual circumstances that gave rise to these issues is integral to production and processing activities, sufficient integration has been established in my view.

The Queen v. Gulf Canada Resources Ltd., 96 DTC 6065, [1996] 2 CTC 55 (FCA)

Although the taxpayer (which was a participant in the Syncrude oil sands project) went on to achieve partial success on other grounds, Pratte J.A. first found that the trial judge erred in finding that in order for the taxpayer to be considered to be "producing" petroleum, it was necessary that there be a prospect of the Syncrude project being profitable in the near future, and also found that the oil producing activities of the project commenced when the mining of the oil sands deposits commenced rather than when the first barrel of synthetic crude was produced.

Gulf Canada Resources Ltd. v. The Queen, 95 DTC 5189, [1995] 1 CTC 334 (FCTD), partially rev'd 96 DTC 6065 (FCA).

Capital cost allowance claims and interest relating to the taxpayer's interest in the Syncrude project were not required to be deducted from its resource profits because, in the taxation year in question (1978) "Syncrude was not capable of being operated on a scale which could be expected to be profitable in 1978 or the near future" (p. 5202). Accordingly, in that year there was no "source of income described in paragraph (b)" as required in Regulation 1204(1)(f).

Echo Bay Mines Ltd. v. The Queen, 92 DTC 6437, [1992] 2 CTC 182 (FCTD)

exact matching not required for hedging

MacKay J. found that the taxpayer (which operated a silver mine in the Northwest Territories) entered into forward sales contracts as hedging transactions and noted that "exact matching was not feasible from a practical point of view, nor is it required in order to constitute hedging" (p. 6447). In going on to find that gains realized by the taxpayer from closing out the forward sales contracts were included in its income from the production of metals for purposes of Regulation 1204(1), he stated (p. 6447):

"Activities reasonably interconnected with marketing the product, undertaken to assure its sale at a satisfactory price, to yield income, and hopefully a profit, are, in my view, activities that form an integral part of production which is to yield income ...".

Words and Phrases

International Nickel Co. of Canada Ltd. v. MNR, 71 DTC 5332 (FCTD)

The taxpayer made continual outlays on scientific research carried out by its personnel in order to identify improvements to its methods for processing ores. In accepting the taxpayer's position that these expenditures (which were deducted by it under s. 72 of the pre-1972 Act) were not deductible from its resource profits for purposes of the depletion allowance. After asserting that "if a patent is obtained the patent will represent a capital asset" (p. 5349), Cattanach J. went on to state that he was "unable to distinguish between an expenditure on scientific research which results in a patent and a similar expenditure which does not result in a patent but does result in the accumulation of a store of new knowledge upon which the appellant can draw and does draw to keep itself to the forefront of the particular trade in which it is engaged" (p. 5349).

See Also

ATCO Electric Ltd. v. The Queen, 2007 DTC 974, 2007 TCC 243

The Court rejected the position of the Crown that the furthest point at which sub-bituminous coal was not beyond its equivalent of the prime metal stage was when it was placed on the reclaim pile, just after having gone through the primary crusher, and accepted the position of the taxpayer that this point was reached later in the crushing process when the coal had been pulverized, just before being introduced as fuel into the generation stations' combustion chamber to manufacture electricity.

Astral Energy Ltd. v. MNR, 90 DTC 1844, [1990] 2 CTC 2422 (TCC)

Bonner J. accepted the taxpayer's submission that the "source of income" referred to in s. 1204(1)(f) are the "oil and gas wells in Canada operated by ...." the taxpayer to whom reference is made in s. 1204(1)(b), rather than referring to "... the oil and gas business, the production of it ...". Accordingly, general and administrative expenses relating not to wells which generated revenues, but to activities intended to result in the acquisition of new wells, did not reduce the resource profits under s. 1204(1).

Administrative Policy

29 November 2012 Internal T.I. 2012-0462361I7 - Meaning of "Prime Metal Stage or its Equivalent"

CRA defines "prime metal stage or its equivalent" in accordance with Canada Pacific Ltd v. Canada, 1994 F.C.J. 993 (FCA), followed in The Queen v. Gulf Canada Resources Ltd., 96 DTC 6065 (FCA), as when "metallurgical and thermal coal has been processed to the condition in which it meets the specifications of its consumers and they buy and take delivery of it as coal in that condition." CRA also stated:

When asked about a specific mineral resource we often consult with Natural Resources Canada in order to determine the prime metal stage or its equivalent for that particular mineral resource. However, our general position is that the prime metal stage or its equivalent is met when the mineral resource has reached a stage at which it is marketable and saleable to another party.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 65 145

26 January 1996 External T.I. 9603015 - RESOURCE PROFITS, DIAMONDS, PRIME METAL STAGE

"The equivalent of the prime metal stage for gem diamonds is the stage at which the rough diamonds have been separated from the gangue (other minerals) and then cleaned with acid and valued."

27 July 1995 Internal T.I. 9514966 - CAPITAL TAX - RESOURCE PROFITS

Notwithstanding Mine Assessor v. Denison Mines Ltd., capital tax attributed to facilities and equipment used in production is considered as a deduction in computing resource profits.

24 December 1992 Memorandum (Tax Window, No. 27, p. 14, ¶2337)

Unrealized gains and losses on gold loans designated by a gold producer as effective hedges of its gold production will be included in resource profits to the extent only of the portion thereof that corresponds to its production for the particular taxation year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit 59

92 C.R. - Q.17

In light of the Echo Bay decision, hedging gains and losses for non-speculative forward sales contracts with respect to hedged amounts of production will be included in the computation of resource profits for the taxation year in which the production of the hedged amount actually takes place.

89 C.R. - Q.22

Any gain or loss realized by a mining company from the borrowing of gold (due to changes in the quantum of its liability) will not constitute income or loss from the production of metal and thus will not enter in the computation of resource profits.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing 42

89 C.P.T.J. - Q21

Because you cannot have income from the production of gas in advance of that production, proceeds which are include in income under s. 12(1)(a) are not eligible for the resource allowance. However, amounts included in income by s. 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.

89 C.P.T.J. - Q22

The resource allowance base of a fully integrated oil and gas company is reduced by CCA claims for Class 13 leasehold improvements. The reduction is calculated on the square footage bases.

89 C.P.T.J. - Q23

List of items which are not deductible in computing the resource allowance base.

Paragraph 1204(1)(b)

See Also

Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 DTC 6532, 2006 SCC 20, [2006] 1 S.C.R. 715

cash-settled derivatives had the effect of fixing mine production]

The taxpayer sold its gold production to bullion dealers at the spot price but also, in order to manage the risk associated with fluctuations in the spot price of gold, entered into cash-settled derivatives such as forward contracts, spot deferred contracts, fixed interest floating lease rate contracts, put options and call options. “Proceeds” for purposes of computing its mining profits under the Mining Tax Act (Ontario) referenced: (a) consideration received from the output of a mine; (b) consideration from hedging; and (c) consideration from future sales or forward sales of the output of the mine That Act in relevant part defined “hedging” as including “the fixing of a price for output of a mine before delivery by means of a forward sale or a futures contract on a recognized commodity exchange.” (LeBel J noted, at para. 51, that in this context “’all consideration from hedging” must necessarily refer to a net concept.”)

In finding that the mining profits of the taxpayer included its profits from settling such derivatives, and in rejecting the taxpayer’s arguments that hedging referred only to contracts which entailed the physical delivery of mine output, LeBel J first noted (at para. 31) that:

at least for the purposes of GAAP, the way in which a derivative contract functions as a “hedge” is unaffected by the method by which the contract is settled

and then went on to state (at para. 46):

[T]he value of a forward sale contract that is settled by delivery of output is for all intents and purposes just the price received for the output. There is no doubt that this amount would be caught by the definition of proceeds, and there would have been no need for the legislature to include this element in a statutory definition of “hedging”. In the circumstances, the presumption against tautology carries considerable weight.

As to the meaning of “hedging,” he stated (at para. 35) that the general principles set out in Echo Mines “have some relevance here.”

He also stated (at para. 51):

[A]lthough forward sales and options are distinguished from one another in terms of the particular way in which each is used to hedge price risk, both are used in much the same way to “fix the price” for output. PDC’s argument about the serious distortion implicit in treating options as a subset of forward sales is belied by the PDC’s own Annual Reports … .

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Interpretation Bulletins, etc. shifting CRA position could not be relied upon except to evidence ambiguity 79
Tax Topics - Statutory Interpretation - Redundancy/reading in words presumption against tautology 120
Tax Topics - Statutory Interpretation - Resolving Ambiguity residual presumption in favour of the taxpayer 133
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Futures/Forwards/Hedges “hedging “ includes cash settled derivatives including options 461
Tax Topics - Statutory Interpretation - Regulations/Statutory Delegation addition of regulation did not significantly expand scope of tax 264

Subparagraph 1204(1)(b)(ii)

See Also

Barrick Gold Corporation v. The Queen, 2017 TCC 18

hedging of price of gold to be produced occurred as part of gold production business

In 1998, the taxpayer was in the business of producing and processing gold in Canada from three mines, including the Doyon Mine in which it had a 50% interest in the Doyon Mine. Prior to 1998, the taxpayer entered into spot deferred forward contracts to hedge some of its anticipated gold production, including anticipated production of 300,000 ounces of gold from the Doyon Mine. Immediately after entering into a letter of intent to sell its interest in the Doyon Mine to the other 50% owner (“Cambior”), on January 20, 1998, the taxpayer purchased 300,000 ounces of gold and used that gold to close out the forward contracts which had hedged the Doyon Mine production (the “Forward Contracts”), thereby realizing a gain of $56,679,461 which, for accounting purposes, it reported as part of its gain on the sale to Cambior. On January 27, 1998, the sale to Cambior was completed (but with a stated effective date of January 1, 1998).

The Minister disallowed the inclusion of the profit from closing out the Forward Contracts in the taxpayer’s gross resource profits within the meaning of Reg. 1204(1)(b) (thereby reducing its resource allowance). The Crown argued inter alia that “the profit on the closeout of the Forward Contracts cannot be connected to production and processing of gold from the Doyon Mine in 1998 because the Appellant did not carry out any production or processing from the Doyon Mine on its own account as of January 1, 1998” (para. 23) and that “the Forward Contracts ceased to be hedges prior to their closeout because as of January 19, 1998, at the latest, the Appellant no longer anticipated any future gold production from the Doyon Mine” (para. 26).

In allowing the taxpayer’s appeal, Paris J stated (at paras 33, 37 and 39):

… [ 3850625] confirmed that the test for whether an item of income should be included in gross resource profits is “whether the [income in question is] sufficiently connected to the [taxpayer’s] production and processing activities to constitute income from that source”…..

I do not accept that it is necessary to relate the Forward Contract profits to production and processing activities carried out in relation to the Doyon Mine in the 1998 taxation year alone in order for the profit to be “sufficiently connected to the production and processing activities to constitute income from that source.”

…[T]he Forward Contracts were entered into and closed out in the course of the Appellant’s business of production and processing from the Doyon Mine. … [T]he Appellant’s sole reason for entering into the Forward Contracts was to hedge the risk of price fluctuations in the price of gold that it expected to produce from the Doyon Mine. …

Locations of other summaries Wordcount
Tax Topics - General Concepts - Accounting Principles character of hedging gain was a legal question not affected by accounting 119

Paragraph 1204(1)(f)

Administrative Policy

27 July 1995 Internal T.I. 9514966 - CAPITAL TAX - RESOURCE PROFITS

"Provincial capital tax paid should be allocated between resource and non-resource activity and capital tax attributed to resource activity is a deduction in determining resource profits."

Subsection 1204(1.1)

Administrative Policy

20 January 2010 Internal T.I. 2009-0348571I7 - Interest Rate Swaps and Resource Profits

a Canadian resource corporation in the ordinary course of business had borrowed under long-term financings and entered into interest rate swaps (apparently to change its effective interest expense from a floating to fixed rate). The taxpayer submitted that payments made under these swaps did not reduce its resource profits because the swaps represented separate sources of income.

The Directorate advised the large case file manager that the payments made (or received) under the swaps should be sourced (in the case of the payments, deducted under Reg. 1204(1.1)(a)(iv) or (v)) to the resource business in the course of which the borrowings had been made even though those borrowings had been repaid. Among other factors, in the financial statements the swap payments were treated as adjustments to the interest expense, and "resource activity" is defined in Reg. 1206(1) to include activities that are "ancillary to, or in support of" a qualifying production activity (para. (g)) and activities taken "as a consequence of" such production activity (notwithstanding the production activity may have ceased.)

15 September 2000 External T.I. 2000-0027485 - Hedging Losses in Resource Profit Calculation

Losses realized by an oil and gas company on several hedging contracts were deductible in computing its resource profits given that they were entered into in the normal course, and as an integral part, of that business and not as a speculation for investment purposes.


Richardson, "Cominco, Westar, and the Legacy of a Gulf", 1993 Canadian Tax Journal, Vol. 41, No. 4, p. 672.

Subsection 1204(3)


The Queen v. Gulf Canada Resources Ltd., 96 DTC 6065, [1996] 2 CTC 55 (FCA)

The extraction by the taxpayer of bitumen from oil sands, and the transformation by it of the bitumen into crude oil, gave rise to "income or loss derived from ... processing petroleum, natural gas or related hydrocarbons" for purposes of the version of Regulation 1204(3) that was applicable to the taxpayer's 1978 taxation year. In particular, the definition of "minerals" in s. 248(1) supposes that bituminous sands are included in the meaning of the phrase "petroleum ... or related hydrocarbons".

Paragraph 1204(3)(a)

See Also

Exxonmobil Canada Ltd. v. The Queen, 2019 TCC 108

income not derived from transporting if no actual revenues therefrom

Crude pumped from an undersea oil reservoir of the Hibernia joint venture up to the “Hibernia Platform” above the ocean surface was temporarily stored there (in the “GBS”) and then pumped from there, through two underwater flow lines, to an “offshore loading system” (“OLS”) two kilometers away (consisting of a north and south base). The OLS was used to load the crude onto tankers for sale and shipment to refineries.

CRA took the position that the production activity referenced in Reg. 1204(1)(b) “ceased at the wellhead” – and it reassessed to the taxpayer (a participant in the joint venture) to reduce the amount of the taxpayer’s production profits by the expenses of the OLS (effectively treating them as equalling the income from transporting the crude, and then deducting the same amounts as an expense applicable to the transportation profits). CRA in particular relied on the exclusion in Reg. 1204(3)(a) for “income … derived from transporting … petroleum”.

In rejecting this adjustment, Owen J stated (at paras. 49, 54-55):

[T]he word “derived” means that the income or loss must exist not because the transporting/transmitting of the petroleum from a natural accumulation of petroleum was necessary in order to sell the petroleum but because the transporting/transmitting of the petroleum in and of itself generated income or a loss. …

[T]he OLS allowed the joint venture owners of the crude to ship that crude to market so that income could be realized from the sale of the crude. However, the income realized by the joint venture owners from the sale of the crude was derived solely from the market value of the crude. The OLS had no impact one way or the other on the amount of income realized by the joint venture owners from the sale of the Hibernia crude and did not in and of itself generate any income or loss for the joint venture owners. …

…[P]aragraph 1204(3)(a) was intended to ensure that additional income derived from transporting/transmitting crude does not attract the resource allowance. It was not intended to reduce a taxpayer’s income from the production of crude when that income reflects solely the market value of the crude.

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Scientific Research & Experimental Development initial well placed in order to validate improved reservoir analysis was not SR&ED 326