Resource Section of CRA Rulings Division issues interpretations

This week the CRA issued four interpretations in the context of natural resource industries.

o Mining. In 2012-0462361I7, the CRA was asked for its view on the meaning of the phrase “prime metal stage or its equivalent”. The concept is relevant for certain tax incentives available to the mining industry. The CRA confirmed that it follows the decision of the Federal Court of Appeal in Canadian Pacific Ltd. v. Canada 1994 F.C.J. 993, which held that the test is met when the mineral “has been processed to the condition in which it meets the specifications of its consumers”. This reasoning was accepted in The Queen v. Gulf Canada Resources Limited, 96 DTC 6065, where the court said “the equivalent of the prime metal stage for mineral production is that point where the production processes have produced a marketable, saleable commodity which meets the specifications of its consumers”.

o Shale Gas. In 2012-0459351E5, the CRA was asked how the costs of drilling and completing a shale natural gas well (including “fracking”) would be treated for tax purposes. The CRA said that in the base case such costs would be considered a “Canadian development expense”, deductible at 30% per year (declining balance). However, if the drilling results either in (a) the discovery of a natural underground gas reservoir, or (b) a dry hole (or the well is abandoned within a specified time limit without having produced), then such costs could be a “Canadian exploration expense” 100% deductible against income in the year. Further, if a well is drilled for the purpose of applied research or experimental development of a new technology, such costs could qualify as “scientific research and experimental development”.

o Electrical Energy. In 2012-0465501E5, the CRA was asked whether “distribution of electrical energy” would include “transmission of electrical energy” for purposes of the definition of Regulation 1100(26)(a). The latter provision describes a corporation whose principal business is, among other things, the sale, distribution or production of energy, including electricity. Citing the decisions in Northern and Central Gas Corporation Ltd., 87 DTC 5439, and Pacific Northern Gas Limited, 91 DTC 5287, the CRA said that “distribution” in this context should be interpreted in a broad and general sense (to include transmission), and should not be given the more restrictive meaning used by the natural gas industry to distinguish “transmission” of natural gas and “distribution” of natural gas.

o Forestry. In 2012-0461021E5, the CRA was asked whether a “woodlot licence” would be a timber resource property or a timber limit for purposes of computing tax deprecation (capital cost allowance). Different tax depreciation rules apply depending on whether the right to harvest the timber is a timber resource property or timber limit. The CRA confirmed its view that timber limits are created where the right to cut timber cannot reasonably be regarded as being a right that is renewable or replaceable. For example, if a taxpayer acquires ownership of land on which there is standing timber (for example, freehold timberlands), the property is a timber limit because the taxpayer’s right to cut would be perpetual, rather than renewable. Conversely, any such right that can reasonably be regarded as renewable or replaceable would be a timber resource property and not a timber limit. On the facts presented, the woodlot licence was renewable in the sense that the Forest Act (British Columbia) requires that another such licence be offered as a replacement during the term of the current licence. Accordingly, the woodlot licence should be a timber resource property.