Principal Issues: Whether paragraph 12(1)(x.2) of the Act applies to the "Credit on Duties Refundable for Losses" [sic, Refundable Duties Credit for Losses] provided under section 32 of the Québec Mining Duties Act.
Position: No.
Reasons: The Credit on Duties Refundable for Losses [sic, Refundable Duties Credit for Losses] does not fall within the ambit of paragraph 12(1)(x.2) of the Act because such credit is not received by the taxpayer in respect of an amount that was at any time receivable by Her Majesty in right of the province of Québec.
XXXXXXXXXX 2005-015845 S. Prud'Homme (613) 957-8975 March 21, 2006
Dear Sir,
Subject: Request for Technical Interpretation - Application of paragraph 12(1)(x.2) of the Income Tax Act to the Refundable Duties Credit for Losses.
This is in response to your email of November 18, 2005 in which you requested our opinion regarding the potential application of paragraph 12(1)(x.2) of the Income Tax Act (the "Act") with respect to the Refundable Duties Credit for Losses (the "RDCL") provided for in section 32 of the Mining Duties Act (R.S.Q., chapter D-15, the "MDA").
Unless otherwise indicated, all references to a statutory section or included provision in this letter are to a section of the Act or one of its provisions.
(1) Brief description of the RDCL
Section 32 of the MDA provides that an operator that sustains an annual loss in a fiscal period may claim an amount as an RDCL. However, that amount cannot exceed 12% of the lesser of the following amounts:
- the "adjusted" annual loss pursuant to section 32.0.1 of the MDA (we understand that this adjustment is intended to exclude from the annual loss the portion that would be attributable to ore processing activities);
- in very summary terms, the amount by which the expenses in respect of exploration, mineral deposit evaluation and mine development work, incurred by the operator for the fiscal period in connection with the mining operation, exceeds the amount of government assistance that the operator received or was entitled to receive that relates to those expenses.
(2) Our Comments
Paragraph 12(1)(x.2) was added to the Act under the 2003 amendments to the mining tax system. Among other things, this provision requires a taxpayer to include in computing income from a business or property an amount that was received by the taxpayer, including by way of a deduction from tax, in the year as a refund, reimbursement, contribution or allowance, in respect of an amount that was at any time receivable, directly or indirectly in any manner whatever, by Her Majesty in right of Canada or of a province in respect of the acquisition, development or ownership of a Canadian resource property, or the production in Canada from a mineral resource, a natural accumulation of petroleum or natural gas, or an oil or a gas well.
It is our view that an amount received by a taxpayer in a particular year as an RDCL would not come within paragraph 12(1)(x.2), and therefore the particular taxpayer would not be required to include that RDCL amount in computing its income under that provision.
Our position in this regard is based, inter alia, on the fact that an amount of RDCL received by a taxpayer would not be an amount received in respect of an amount receivable, directly or indirectly, in any manner whatsoever, by Her Majesty in right of the Province of Quebec. Indeed, there appears to be no relationship between the RDCL and the amount of duty that the taxpayer must pay, will pay or has had to pay by virtue of the MDA. To illustrate this point, one must realize that a taxpayer who has sustained an annual loss for the purposes of the MDA may claim an amount as an RDCL in a given year, even if the taxpayer has never paid duties under the MDA and even if the taxpayer will never pay any. The RDCL is first and foremost a "credit for loss", i.e. a credit for a loss incurred by a taxpayer. Indeed, an operator can only claim an amount as an RDCL to the extent that the taxpayer incurs an annual loss in a given fiscal period. The fact of incurring a loss is the only real condition to be satisfied in order to claim an RDCL amount. Consequently, an RDCL amount received by a taxpayer would not be an amount received in respect of an amount receivable by Her Majesty in right of the Province of Quebec under the MDA or any other Act.
Furthermore, the Canada Revenue Agency ("CRA") has taken the position in the past that the RDCL does not reduce cumulative Canadian exploration expenses ("CCEE") and cumulative Canadian development expenses ("CCDE"), on the basis that the RDCL was too remote from the Canadian exploration expense ("CEE") and Canadian development expense ("CDE") and therefore did not have a sufficiently direct connection to the CEE and CDE incurred by the particular corporation to fall within element J of the definition of CCEE in subsection 66.1(6) and the description of M in the definition of CCDE in subsection 66.2(5) (formerly subparagraphs 66.1(6)(b)(ix) and 66.2(5)(b)(xi)).
We are also of the view that paragraph 66(12.6)(a) should not apply to an amount that a corporation has received, is entitled to receive, or may reasonably expect to receive as an RDCL at a particular time, since it would not be reasonable to relate that amount as an RDCL to CEE incurred or to related Canadian exploration activities. That is because the RDCL amount would be too remote from the CEE incurred or related Canadian exploration activities and therefore would not be sufficiently directly related to such CEE and activities to come within paragraph 66(12.6)(a).
In closing, the CRA's current position is that an amount received by a taxpayer as an RDCL in a particular year would not become within paragraph 12(1)(x), and therefore the particular taxpayer would not be required to include that RDCL amount in computing income under that provision.
We hope that these 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