Principal Issues: In a given fact situation, whether income from crushing nickel ore on surface would be included in the gross resource profits of a taxpayer for a particular taxation year under clause 1204(1)(b)(iii)(A) of the Regulations?
Position: Yes.
Reasons: In the given fact situation, the crushing activities would be part of the processing of ore.
2005-012129
XXXXXXXXXX Guy Goulet, CA, M.Fisc.
(613) 957-9768
May 24, 2005
Dear Madam,
Subject: Resource allowance
This is in response to your email of March 15, 2005 in which you asked us certain questions regarding the Particular Situation described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Particular Situation:
The Particular Situation as you have presented it to us is as follows:
1. A taxpayer (Opco) operates a bulk ore hauling business in Canada.
2. Mineco is a taxable Canadian corporation that mines mineral resources in Canada.
3. One of the deposits exploited by Mineco is a high-grade nickel deposit (Nickel Deposit). The Nickel Deposit is mined by means of an underground mine. Before being brought to the surface, the ore from the Nickel Deposit is first crushed underground (First Crushing). After being brought to the surface, the ore must undergo a second crushing (Second Crushing) in order to reduce the size of the ore pieces to a size suitable for processing in the processing plant (Mill). After the Second Crushing, the ore is transported by truck or conveyor to the Mill.
4. Opco, as a subcontractor of Mineco, provides crushing services for the Second Crushing. In order to carry out this contract, Opco has acquired a mobile crushing plant (Mobile Plant). The Mobile Plant has been installed at the mine site and can be removed at the end of the contract.
Your Questions:
You would like the following questions to be answered:
1. Does the Second Crushing constitute "manufacturing or processing" as defined in subsection 125.1(3) by Opco?
2. Is Opco entitled to a resource allowance under paragraph 20(1)(v.1)? In particular, does Opco's income from the Second Crushing count towards its "gross resource profits" (GRP) for a taxation year within the meaning of subsection 1204(1) of the Income Tax Regulations (Regulations)?
3. In what class of property in Schedule II of the Regulations will the Mobile Plant be included?
Your Analysis:
1. You are of the view that the Second Crushing is not a "manufacturing or processing" activity of Opco since the extraction of minerals from a mineral resource and the processing of minerals are specifically excluded in paragraphs (e) and (f) of the definition of that term in subsection 125.1(3).
2. You are of the view that Opco is entitled to the resource allowance under paragraph 20(1)(v.1) since you believe that the Second Crushing revenues are included in computing GRP pursuant to clause 1204(1)(b)(iii)(A) of the Regulations.
3. Finally, you are of the view that the Mobile Plant should be included in Class 10 of Schedule II to the Regulations pursuant to paragraph (k) of that class. You are of the view that the Mobile Plant was acquired by Opco for the purpose of earning "income from a mine" as that term is defined in paragraph 1104(6)(a) of the Regulations.
Our Comments
It appears to us that the situation described in your letter may be an actual situation involving taxpayers. The Canada Revenue Agency ("CRA") does not generally provide written opinions on proposed transactions otherwise than by way of advance ruling. Furthermore, it is the responsibility of the relevant Tax Services Office to determine whether completed transactions have received appropriate tax treatment. However, we can offer the following general comments which may not be fully applicable in a particular situation.
With respect to your first question, we agree with you that the Second Crushing activity would not qualify as "manufacturing or processing" within the meaning of the definition of that term in subsection 125.1(3) since it would be the "processing" of ore from mineral resources located in Canada to a stage that is not beyond the prime metal stage or its equivalent.
With respect to your second question, we agree with you that the revenues that Opco would earn in a particular year from the Second Crushing activity could be included in computing its GRP for that year under clause 1204(1)(b)(iii)(A) of the Regulations since they could constitute revenues for the year from the processing in Canada of ore derived from mineral resources in Canada that would not be mined by Opco to any stage that is not beyond the prime metal stage or its equivalent.
Regarding your third question, we agree with you that the Mobile Plant could be a property that would be included in Class 10 of Schedule II of the Regulations pursuant to paragraph (k) of that class.
Finally, please note that our comments do not constitute an advance income tax ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, are not binding on the CRA with respect to any particular situation.
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Directorate General for Policy and Planning