Vol. 140, No. 39 — September 30, 2006

Regulations Amending the Income Tax Regulations (Natural Resources)

Statutory authority

Income Tax Act

Sponsoring department

Department of Finance

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Description

This initiative implements regulatory changes consequent upon the introduction of the new regime for taxing resource income. This new regime was first announced in Budget 2003 and passed into law by An Act to amend the Income Tax Act (Natural Resources) ["Bill C-48"], which was given royal assent on November 7, 2003. Two notable changes made in Bill C-48 were the elimination of the deduction for the resource allowance and the removal of the prohibition against the deduction for Crown royalties and mining taxes. These changes are being implemented in stages beginning in taxation years that end after 2002 and ending with taxation years that begin after 2006.

The proposed regulatory amendments were first made public on June 9, 2003, through a Finance Canada news release. They are intended to ensure that the Income Tax Regulations (the "Regulations") properly reflect the changes made by Bill C-48 (i.e. provide for the repeal of certain provisions that will no longer be relevant for taxation years that begin after 2006) and to clarify the application of the rules relating to capital cost allowance claims in respect of mining assets.

These proposed amendments do not include the portion of the proposed amendments, released on June 9, 2003, relating to the deduction for mining taxes (Regulation 3900). The proposed amendments to Regulation 3900 were modified and a revised draft version of Regulation 3900 was released for comment on December 21, 2004. Regulation 3900 was subsequently published separately in the Canada Gazette, Part I, on December 24, 2005.

Alternatives

The proposed amendments are necessary to reflect changes to the Act made by Bill C-48. There are no alternative means of achieving this result.

Benefits and costs

A detailed discussion of the rationale for the resource tax changes is set out in a technical paper entitled "Improving the Income Taxation of the Resource Sector in Canada," issued by the Minister of Finance on March 3, 2003.

The resource allowance, which is being repealed under the proposed regulatory changes, provides a deduction to a taxpayer earning resource income in lieu of a deduction for Crown royalties and mining taxes. However, the resource allowance does not reflect the actual Crown royalties and mining taxes borne by the taxpayer. The purpose in repealing the resource allowance and providing a deduction for Crown royalties and mining taxes is to recognize actual costs, thereby treating all resource projects in a comparable fashion. As a result, investment decisions will be based more consistently on the underlying economics of each project.

Consultation

The amendments were finalized after a lengthy consultation period beginning with the announcement of the proposals in Budget 2003.

Strategic environmental assessment

The proposed amendments are primarily intended to update the Regulations to reflect changes to the Income Tax Act enacted in 2003 by Bill C-48. These changes to the Income Tax Act include the phasing-out of the resource allowance, which is calculated under Part XII of the Regulations. Accordingly, these amendments are merely incidental to earlier amendments to the Income Tax Act and are not expected to have any significant environmental impact.

Compliance and enforcement

The Income Tax Act contains the necessary compliance mechanisms to allow the Minister of National Revenue to assess and reassess taxes payable, conduct audits and seize relevant records and documents.

Contact

Daryl Boychuk, Tax Legislation Division, Department of Finance, L'Esplanade Laurier, 140 O'Connor Street, Ottawa, Ontario K1A 0G5, 613-992-0049 (telephone).

PROPOSED REGULATORY TEXT

Notice is hereby given that the Governor in Council, pursuant to section 221 of the Income Tax Act (see footnote a), proposes to make the annexed Regulations Amending the Income Tax Regulations (Natural Resources).

Interested persons may make representations with respect to the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Daryl Boychuk, Tax Legislation Division, Department of Finance, L'Esplanade Laurier, 17th Floor, East Tower, 140 O'Connor Street, Ottawa, Canada, K1A 0G5.

Ottawa, September 21, 2006

MARY O'NEILL
Assistant Clerk of the Privy Council

REGULATIONS AMENDING THE INCOME TAX REGULATIONS (NATURAL RESOURCES)

AMENDMENTS

1. (1) Subparagraph 1100(1)( w )(i) of the Income Tax Regulation (see footnote 1) is replaced by the following:

(i) the taxpayer's income for the year from the mine, before making any deduction under this paragraph, paragraph (x), (y) or (ya), section 65, 66, 66.1, 66.2 or 66.7 of the Act or section 29 of the Income Tax Application Rules, and

(2) Subparagraph 1100(1)( x )(i) of the Regulations is replaced by the following:

(i) the taxpayer's income for the year from the mines, before making any deduction under this paragraph, paragraph (ya), section 65, 66, 66.1, 66.2 or 66.7 of the Act or section 29 of the Income Tax Application Rules, and

(3) Subparagraph 1100(1)( y )(i) of the Regulations is replaced by the following:

(i) the taxpayer's income for the year from the mine, before making any deduction under this paragraph, paragraph (x) or (ya), section 65, 66, 66.1, 66.2 or 66.7 of the Act or section 29 of the Income Tax Application Rules, and

(4) Subparagraph 1100(1)( ya )(i) of the Regulations is replaced by the following:

(i) the taxpayer's income for the year from the mines, before making any deduction under this paragraph, section 65, 66, 66.1, 66.2 or 66.7 of the Act or section 29 of the Income Tax Application Rules, and

2. Section 1104 of the Regulations is amended by adding the following after subsection (8):

(8.1) For greater certainty, for the purposes of paragraphs (c) and (e) of Class 28 and paragraph (a) of Class 41 in Schedule II, production means production in reasonable commercial quantities.

3. (1) Paragraph 1204(3)( b ) of the Regulations is replaced by the following:

(b) any income or loss arising because of the application of paragraph 12(1)(z.1) or (z.2) or section 107.3 of the Act; and

(2) Subsections 1204(4) and (5) of the Regulations are repealed.

4. (1) The definitions "exempt partnership", "production royalty" and "specified royalty" in subsection 1206(1) of the Regulations are repealed.

(2) Paragraph ( b ) of the definition "production royalty" in subsection 1206(1) of the Regulations is replaced by the following:

(b) the taxpayer would, but for an exemption or allowance (other than a rate of nil) that is provided, pursuant to a statute, by a person referred to in subparagraph 18(1)(m)(i) of the Act, have a Crown royalty in respect of which paragraph (a) is applicable; (redevance de production)

(3) Subsection 1206(8.1) of the Regulations is replaced by the following:

(8.1) For the purpose of paragraph (a) of the definition "qualified tertiary oil recovery project" in subsection (1), a specified royalty provision is deemed to apply as of a particular time if, at the particular time, unconditional approval for the specified royalty provision to apply at a time after the particular time is given by

(a) Her Majesty in right of Canada or of a province;

(b) an agent of Her Majesty in right of Canada or of a province; or

(c) a corporation, a commission or an association that is controlled by Her Majesty in right of Canada or of a province or by an agent of Her Majesty in right of Canada or of a province.

(4) Subsection 1206(9) of the Regulations is repealed.

5. (1) The portion of subsection 1210(1) of the Regulations before the formula is replaced by the following:

1210. (1) For the purpose of paragraph 20(1)(v.1) of the Act, the amount allowed to a taxpayer for a taxation year is the amount determined by the formula

(2) Section 1210 of the Regulations is repealed.

6. Sections 1210.1 and 1211 of the Regulations are repealed.

7. (1) The definition "adjusted business income" in subsection 5203(1) of the Regulations is amended by adding the word "and" at the end of paragraph ( b ), by striking out the word "and" at the end of paragraph ( c ) and by repealing paragraph ( d ).

(2) Paragraph 5203(2)( a ) of the Regulations is replaced by the following:

(a) in computing its income for the year, an amount is deductible pursuant to any of sections 65 to 66.2 of the Act;

(3) Subsection 5203(4) of the Regulations is replaced by the following:

(4) For the purpose of subsection (1), "refund interest" means an amount that is received, or that becomes receivable, after March 6, 1996 from an authority (including a government or municipality) situated in Canada as a consequence of the overpayment of a tax that was not deductible under the Act in computing any taxpayer's income and that was imposed by an Act of Canada or a province or a bylaw of a municipality.

APPLICATION

8. (1) Section 1, subsections 3(1), 4(1) and (4) and 5(2) and sections 6 and 7 apply to taxation years that begin after 2006.

(2) Section 2 applies to property acquired after 1987.

(3) Subsection 3(2) applies to taxation years that begin after 2003.

(4) Subsection 4(2) applies to royalties paid after December 20, 2002 in taxation years that begin before 2007.

(5) Subsection 4(3) is deemed to have come into force on December 21, 2002.

(6) Subsection 5(1) applies to taxation years that end after 2002 and begin before 2007.

[39-1-o]

Footnote a

R.S.C. 1985, c. 1 (5th Supp.).

Footnote 1

C.R.C., c. 945

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