Subsection 1204(1)
Cases
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 (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 (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 (FCTD)
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 ...".
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 (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 Memorandum 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.
26 January 1996 T.I. 960301 (C.T.O. "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."
28 July 1995 Memorandum 7-951496
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, ΒΆ2337)
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.
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.
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)(f)
Administrative Policy
28 July 1995 Memorandum 7-951496
"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 Memorandum 2009-0348571I7
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 Memorandum 2000-002748
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.
Articles
Richardson, "Cominco, Westar, and the Legacy of a Gulf", 1993 Canadian Tax Journal, Vol. 41, No. 4, p. 672.
Subsection 1204(3)
Cases
The Queen v. Gulf Canada Resources Ltd., 96 DTC 6065 (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".