Principal Issues: Whether excavating and extracting slate from a pit area constitutes producing industrial minerals (subparagraph (c)(vii) of "qualified property" in subsection 127(9)), or whether it constitutes extracting minerals from a mineral resource.
Position: Excavating and extracting slate from a pit area would constitute "producing industrial minerals" (subparagraph (c)(vii) of "qualified property" in subsection 127(9)).
Reasons: Wording of the Act and opinion of Natural Resources Canada
2007-022742 XXXXXXXXXX S. Prud'Homme (613) 957-8975 September 11, 2007
Dear Madam,
Subject: Quarry Slate Harvesting - Subsections 127(5) and (9) of the Income Tax Act
This is in response to your email of March 14, 2007, in which you asked whether the harvesting of slate from a quarry constitutes "producing industrial minerals" or "extracting minerals from a mineral resource". If so, the acquisition of "eligible property" that would be used in Canada primarily for one of these purposes would allow the taxpayer in question to claim an investment tax credit ("ITC") for tax purposes.
Unless otherwise indicated, any reference in this document to a section of the Act or any of its components is a reference to a section of the Income Tax Act (the "Act") or any of its components.
(1) Background - Relevant tax legislation
In summary, subsection 127(5) provides that any ITC of a taxpayer at the end of a taxation year, in respect of property acquired before the end of the year, is deductible against that taxpayer's tax otherwise payable under Part I for the taxation year.
Paragraph (a) of the definition of ITC in subsection 127(9) provides, inter alia, that a taxpayer's ITC at the end of a taxation year is the amount, if any, by which the aggregate of all amounts each of which is the "specified percentage" of the capital cost to the taxpayer of a "qualified property" acquired in the year.
The concept of “qualifying property" is also defined in subsection 127(9). It includes property that is prescribed machinery or equipment (see subsection 4600(2) of the Income Tax Regulations) acquired by the taxpayer after June 23, 1975, that has not been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer and that is to be used by the taxpayer in Canada primarily for the purpose of extracting minerals from a “mineral resource” (as defined in subsection 248(1); see subparagraph (c)(v) of "qualified property" in subsection 127(9)) or for producing industrial minerals (see subparagraph (c)(vii) of "qualified property" in subsection 127(9)).
2) Your question regarding this case
You wish to know whether the work of harvesting slate from a quarry, using an excavator and other mining equipment, qualifies as producing industrial minerals (subparagraph (c)(vii) of "qualified property" in subsection 127(9)) or as extracting minerals from a mineral resource (subparagraph (c)(v) of "qualified property" in subsection 127(9)).
3) Our comments on this case
The Act classifies mineral deposits into two broad categories: minerals and industrial minerals.
The term "mineral" is defined in subsection 248(1) and includes a mineral deposit in respect of which the Minister of Natural Resources has certified that the principal mineral extracted is an industrial mineral contained in a non-bedded deposit (refer to subparagraph (d)(i) of the definition of "mineral" in subsection 248(1)). Note that under subsection 248(1), the term "mineral" as used in the Act has the same meaning as "mineral material".
Paragraph 3 of Interpretation Bulletin IT-492, Capital Cost Allowance (November 8, 1982), states that the term "industrial mineral" means a non-metallic mineral capable of being used in industry. Interpretation Bulletin IT-492 also states that the word "mineral" should be given the meaning of any chemical or compound occurring naturally as a product of inorganic processes. Paragraph 3 of Interpretation Bulletin IT-492 goes on to list a number of the better known "industrial minerals". This list is not intended to be exhaustive.
Our colleagues at the Ministry of Natural Resources have indicated that they are of the view that slate, if mined for roofing or flooring tiles, would certainly qualify as an industrial mineral.
Furthermore, with respect to subparagraph (d)(i) of the definition of "mineral" in subsection 248(1), our colleagues at the Department of Natural Resources have advised us that, in order to determine whether a particular slate deposit is non-bedded, a description of the geology of the deposit would be necessary and a site inspection might be required. However, experts from the Ministry of Natural Resources have advised us that the degree of metamorphism that the primary rock has undergone is unlikely to have completely erased the stratification of the deposit. Under those conditions, the deposit would therefore be excluded from the definition of "mineral" in subsection 248(1). Finally, we understand that a particular deposit would not fall within subparagraph (d)(i) of the definition of "mineral" in subsection 248(1) if there is no "principal mineral" extracted. We also understand that the determination of the latter element should be based on the relevant facts relating to the extraction patterns of the quarry in question.
In view of the above, slate mining would therefore, by default, be "producing industrial minerals" described in subparagraph (c)(vii) of "qualified property" in subsection 127(9).
In closing, we draw your attention to paragraph 11 of Interpretation Bulletin IT-145R, "Canadian Manufacturing and Processing Profits - Reduced Rate of Corporate Tax" (January 9, 2004), which indicates that the concept of "producing industrial minerals" must be distinguished from subsequent processing-related activities.
Producing industrial minerals is considered to include all activities connected with the mining, excavating and extracting the mineral material from the mine or pit area, including any primary crushing operation required to make it transportable from the mine or pit area as well as the transporting of the material from the mine or pit. Subsequent activities such as crushing, washing, screening and sorting of the mineral material in order to make the product of the mine or pit marketable are considered to be processing activities. The CCRA recognizes that in some cases some or all of these subsequent activities may be conducted within the confines of the mine or pit, in which case processing will commence after the delivery of the excavated pit run material to the first of these processing operations.
We apologize for the delay in responding to your request. We hope that our comments are of assistance.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
For the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.