27 June 1989 Income Tax Severed Letter AC80301 - Receipts under a Take-or-pay Contract as Income from the Production of Petroleum or Natural Gas

To: R.J. Angus                     Resources Industries Section
    Appeals and Referrals          John Shaw
    Appeals Branch                 (613) 957-8968

20(1)

Regulation 1204(1)

In reply to your memorandum of June 20, 1989, we remain of the view that receipts under a take-or-pay contract are not income from the production of petroleum or natural gas for the purposes of subparagraph 1204(1)(b)(i) of the Income Tax Regulations. We have considerable difficulty with the suggestion that this conclusion is inconsistent with our view that costs such as scientific research expenditures which reasonably relate to future production must be deducted in establishing the net income from production. With respect to the former item, it is unknown at the time the take-or-pay agreement is entered into whether any of the income under the contract will be from a natural resource - ie, the source of any income under the take-or-pay contract is then unknown. While we readily admit that whether a particular scientific research expenditure will actually result in income from the production of the natural resource is not known, whether the expenditure relates to the production of a natural resource rather than its processing or distribution or some other activity should be determinable. In the latter case it is not clear what source the item relates to, in the former, it is not.

Your orange appeals file and the attachments which accompanied it are returned herewith.

Chief Resource Industries Section Bilingual Services and Resources Industries Division Rulings Directorate