Principal Issues: Question 4: Will the CRA's treatment of farmouts, as expressed in IT-125R4, par. 14, be extended to transactions where the farmor grants a royalty to the farmee?
Position: Generally, maintain the administrative treatment set forth in IT-125R4, par. 14.
Reasons: In light of the variety of interests that could be granted as consideration for the farmee's undertakings, it is appropriate to consider any particular interest that is to be granted in the context of an individual advance income tax ruling application and according to the historical basis for the administrative treatment.
2012 Canadian Petroleum Tax Conference
Question 4 -- Farmout Arrangements
The CRA's longstanding position on farmout arrangements which do not give rise to proceeds of disposition to the farmor is set forth in IT-125R4, paragraph 14. In CRA Document 9406335, the CRA stated that it would not extend the above-noted position in IT-125R4 to the acquisition of a royalty in exchange for exploration and drilling activities performed by the farmee on unproven Canadian resource properties of the farmor. Is the CRA prepared to extend its policy in IT-125R4 to a situation where (i) the requirements in IT–125R4 are otherwise met, and (ii) the interest transferred by the farmor to the farmee is a royalty?
CRA Response
The CRA will continue its treatment of farmout arrangements as described in IT-125R4, paragraph 14, and as described in CRA Document 9406335. As stated in the latter document, the Income Tax Rulings Directorate is prepared to consider, on an individual basis in the context of an advance income tax ruling application, whether such farmout treatment will be applied to a proposed transaction wherein a farmee is to obtain a royalty interest in exchange for exploration and drilling activities that it will perform on an unproven property of the farmor.
Marc Edelson
2012-044643
May 15, 2012