|
Tax
and Revenue Administration
Alberta Corporate
Tax Act
Information
Circular CT-18R3 PART 2 |
| Last Reviewed: |
June 2000 |
| Produced by: |
Alberta Finance, Tax and
Revenue Administration |
| For more information: |
tra.revenue@gov.ab.ca |
CT-18R3 Part 2 / June 2000
ALBERTA CORPORATE
TAX ACT INFORMATION CIRCULAR:
ALBERTA ROYALTY TAX CREDIT
- PART 2
Part 1 of this Information Circular describes the calculation of, and the means by
which corporations apply for, the Alberta Royalty Tax Credit. Part
2 provides the definitions and rules relating to restricted resource properties.
The basic
rules are mapped out in a "Decision Tree" (a
PDF file).
The topics discussed under Part 2: Restricted Resource Property Rules are:
- There have been two major sets of amendments designed to limit the multiplication of
ARTC that could otherwise occur if a corporation claiming the maximum credit disposes of
an interest in production to a party claiming less than the maximum. The amendments
inhibit multiplication primarily by excluding certain royalties from Alberta crown
royalty.
- The first set of amendments focused on August 24, 1982. These amendments notionally
classified all oil and gas wells into two groups: those with finished drilling dates on or
before August 24, 1982 and those with finished drilling dates after August 24, 1982.
Corporations were notionally classified as being, or not being, "above-limit"
(at the maximum credit) at August 24, 1982. The term "restricted resource
property" was assigned to any interest in an oil or gas well with a finished drilling
date on or before August 24, 1982 that, on August 24, 1982, was owned by an above-limit
corporation or by an above-limit partnership (a partnership of above-limit corporations).
If a corporation that was not at its maximum credit at August 24, 1982, acquires a
restricted resource property, royalties relating to that property cannot be included in
its Alberta crown royalty.
- The second set of anti-multiplication amendments concentrates on dispositions after
April 7, 1986, of interests in any well with a finished drilling date prior to the date of
disposition. If the party disposing of the interest is a "restricted
corporation" (at its maximum credit in the previous taxation year), the interest
becomes a restricted resource property to the immediate acquirer and all subsequent
holders. Royalties on production attributed to that interest cannot be included in the
Alberta crown royalty of any of these parties.
- The essential rules of these two sets of amendments are portrayed graphically on the
"Decision Tree" (a PDF file) that is
provided with this Circular and are described in paragraphs 5 to 21 below.
- The Decision Tree is constructed from the viewpoint of a corporation (referred to as the
"purchaser") that is considering acquiring, or that has already acquired, a
working interest in a completed oil or gas well on Crown land in Alberta (the
"interest") and that wishes to know whether the royalties on production
attributed to that interest can be included in its Alberta crown royalty. The party
disposing of the interest is referred to as the "vendor". Various decision or
action points contain technical terms enclosed in quotation marks. The paragraph numbers
beside these decisions or actions refer to paragraphs in this Circular wherein the
technical terms are discussed.
- The Decision Tree does not contemplate the results of the application of relieving or
anti-avoidance provisions contained in the legislation. These matters are discussed under
separate subheadings in this Circular.
- The Decision Tree is organized in such a way that questions that are perceived to have
relatively accessible answers are presented first. For instance, fairly early in the
decision process, the purchaser is required to determine whether the vendor is a
restricted corporation. If the answer is "yes", there is no need to ask any more
questions. If the answer is "no", the party doing the evaluation must look
further back in the history of the interest. He is, in fact, told to review all
dispositions of the interest occurring after the latest of April 7, 1986 and the finished
drilling date of the well. It is recognized that there may be difficulty in assembling
information about the status of every person that at one time held a particular interest
if the interest has changed hands several times. However, this difficulty does not absolve
the purchaser from the consequences of acquiring a restricted resource property. It is
assumed that persons acquiring an interest alleged not to be a restricted resource
property would require warranties to that effect.
Finished Drilling Date
- Under regulations to the Oil and Gas Conservation Act, "finished
drilling date" is defined as "the date at which the total depth of a well is
reached without regard for any deepening that may be made after substantially continuous
drilling has once ceased". This date is determined by the Alberta Energy and
Utilities Board ("AEUB") (formerly the Energy Resources Conservation Board
("ERCB")).
- Under certain circumstances, the AEUB will assign a new finished drilling date to a well
that is reworked. In these cases, the new finished drilling date will be accepted for
purposes of determining whether or not the well is a restricted resource property.
Above-limit
Corporations and Partnerships
- An "above-limit entity" may be either a corporation or a partnership.
a) An above-limit corporation is one of the following:
(i) a corporation that in the 12-month period ending August 31, 1982 had Alberta crown
royalty of more than $5,333,333. Such a corporation, had it had a taxation year ending
August 31, 1982, would have been able to claim the $4,000,000 maximum credit in that year;
(ii) a corporation that is a member of an associated group whose combined Alberta crown
royalty in the 12-month period ending August 31, 1982 exceeded $5,333,333; or
(iii) a corporation deemed by the Provincial Treasurer to be an above-limit
corporation. A corporation may be deemed to be an above-limit corporation if it:
- during the year ending August 24, 1982, was either formed by amalgamation or acquired an
Alberta resource property; and
- during any one of the months of July, August or September, 1982, had Alberta crown
royalty of more than $444,444.
b) An above-limit partnership is a partnership in existence on August 24, 1982
whose members at that date were all above-limit corporations. For the purpose of this
definition, an arrangement will be held to be a partnership only if a written partnership
agreement and other supporting evidence were in existence on August 24, 1982.
Exempt Corporations
- An above-limit corporation may include in its Alberta crown royalty, royalties on
production from property that was restricted resource property at August 24, 1982, even if
the property was acquired after August 24, 1982. Viewed in this context, the corporation
acquires the title of "exempt corporation".
- Subject to the anti-avoidance provision discussed in paragraph 22, exempt status flows
through to a successor corporation formed by the amalgamation of:
a) a corporation and one or more wholly-owned subsidiaries, if any predecessor is an
exempt corporation;
b) two or more wholly-owned subsidiaries of the same parent corporation, if any
predecessor is an exempt corporation, and
c) any other corporations, if all predecessors are exempt corporations.
- Exempt status also flows through to a parent corporation in the event of the wind-up of
an exempt subsidiary, providing the parent acquires all the "Alberta resource
properties" of the subsidiary and provided subsection 88(1) of the federal Act
applies to the wind-up. "Alberta resource property" includes:
a) petroleum or natural gas wells in Alberta;
b) rights to explore for, drill for or take petroleum and natural gas in Alberta;
c) rentals or royalties computed by reference to the value or amount of production from
a petroleum or natural gas well in Alberta; and
d) interests of any nature in property described in (a) to (c), including rights to
receive proceeds of disposition on the disposition of that property.
- Subject to the anti-avoidance provision discussed in paragraph 22, exempt status may
also be transferred by election under section 26(1.7)(b) when one corporation acquires all
the Alberta resource properties of another corporation. The purchaser, the vendor and each
of the corporations with which the vendor is associated at the time of the disposition
must be party to the election. Given such an election, the purchaser shall be deemed to be
an exempt corporation as of the first day of the year in which the acquisition of
properties occurred; the vendor and each of its associated corporations shall be deemed to
be non-exempt as of the first day of their taxation years in which the properties were
transferred.
The election must be filed in prescribed form on or before the earliest of
the days on which any of the corporate parties to the election is required to file its tax
return for the year in which the transfer of properties occurred. An election will be
accepted as a late-filed election if it is filed in prescribed form within two years after
the required filing date and the applicable late-filing penalty is paid within 30 days of
the mailing of the notice of assessment. The penalty is $200 for each complete month that
the election is late.
Restricted Corporations
- A corporation is a restricted corporation at the date of disposition of a working
interest or at any other particular time if, in its latest taxation year ending before
that time, its Alberta crown royalty exceeded a defined amount. The defined amounts are:
a) $4,000,000, applicable to determinations made prior to January 1, 1990;
b) $2,500,000, applicable to determinations made after December 31, 1989 and prior to
January 1, 1995; or
c) $2,000,000, applicable to determinations made after December 31, 1994.
If the corporation was associated with one or more corporations in that latest taxation
year, the test for restricted corporation status also looks at the Alberta crown royalty
of the associates for their taxation years ending in the corporation's latest taxation
year.
- The legislation provides refinements to the test for restricted status if a relevant
taxation year of either the vendor corporation or an associated corporation was a short
year or if the vendor had no taxation year end at all before that date of disposition of
property. Generally, if the relevant taxation year of the corporation was other than 365
days, its Alberta crown royalty for that year must be "annualized", that is,
multiplied by the ratio that 365 is to the number of days in the taxation year.
- The various situations contemplated in the legislation and the resulting calculation of
Alberta crown royalty for purposes of the restricted status test are as follows:
a) Vendor is a newly incorporated corporation with no taxation year end preceding the
date of disposition.
For purposes of determining its own Alberta crown royalty, the vendor is deemed
to have a taxation year commencing on the day that it commenced carrying on business and
ending on the day before the date of disposition. For the restricted status test, the
Alberta crown royalty is the aggregate of:
(i) the Alberta crown royalty of the vendor for the deemed year described above,
annualized; and
(ii) the Alberta crown royalty of each associate for its taxation year ending in the
365-day period ending immediately before the disposition, annualized if the taxation year
of the associate was not 365 days.
b) Vendor is a newly amalgamated corporation with no taxation year end preceding the
date of disposition.
The vendor is deemed to have a 365-day taxation year ending on the day before the date
of disposition. The Alberta crown royalty used in the test for restricted status includes:
(i) the actual Alberta crown royalty of the vendor in the 365-day period;
(ii) the actual Alberta crown royalty of each predecessor corporation in the 365-day
period;
(iii) the Alberta crown royalty of its own associates for their taxation years ending
in the 365-day period, annualized for short years; and
(iv) for each corporation associated with a predecessor corporation in the 365-day
period, the Alberta crown royalty of that associate for its taxation year ending in the
365-day period, annualized for short years.
c) Vendor is a newly incorporated corporation and has had one taxation year only,
that one being a short year.
The vendor's last taxation year is deemed to be a 365-day period that ends on the last
day of the vendor's first taxation year. The Alberta crown royalty used in the test for
restricted status is the aggregate of:
(i) the Alberta crown royalty of the vendor for its first taxation year; and
(ii) the Alberta crown royalty of each associate for the associate's taxation year that
ends in the 365-day period set out above, annualized if the associate's taxation year was
not 365 days.
d) Vendor is a newly amalgamated corporation and has had one taxation year only,
that one being a short year.
The vendor's latest taxation year is deemed to have been a 365-day year ending on the
day that the actual year ended. The inclusions in Alberta crown royalty are:
(i) the vendor's actual Alberta crown royalty for its short year;
(ii) the actual Alberta crown royalty of each of the predecessor corporations in the
365-day period;
(iii) the Alberta crown royalty of each of the vendor's associates for the taxation
years ending in the 365-day period, annualized; and
(iv) for each corporation associated with a predecessor corporation during the 365-day
period, the Alberta crown royalty of that associate for its taxation year ending in the
365-day period, annualized.
e) Vendor has a short taxation year that has been preceded by one or more taxation
years.
If the vendor has no associated corporations, its restricted status test is based on
its Alberta crown royalty for the short year, annualized. Otherwise, the inclusions in
Alberta crown royalty for the restricted status test are:
(i) the vendor's Alberta crown royalty for a deemed 365-day taxation year that ends on
the day the short year ended; and
(ii) for each corporation with which the vendor was associated in that deemed 365-day
taxation year, the Alberta crown royalty of the associate for the taxation year ending in
the 365-day period, annualized.
Restricted Partnerships and Restricted Percentage
- A partnership is a "restricted partnership" at a particular time if, at any
time in the 365-day period preceding the particular time, one or more restricted
corporations were partners. The rules requiring annualization of Alberta crown royalty and
the deeming provisions described in paragraph 17 above apply in the determination of
whether a partner is a restricted corporation.
- If a restricted partnership disposes of an interest in production, subsequent holders of
that interest must exclude from Alberta crown royalty the "restricted
percentage" of royalties attributable to that interest.
- To evaluate the effect of this rule, the purchaser must look to the partnership's profit
allocations for both the fiscal period preceding the date of disposition and the fiscal
period in which the disposition occurs. The "restricted percentage" is the
greater of:
a) the percentage of profits allocated to restricted corporations in the preceding
fiscal period; and
b) the percentage of profits allocated in the current period to restricted corporations
that were partners during the fiscal period on or before the date of disposition.
- If an interest has been held and disposed of by one restricted partnership and
subsequently is held and disposed of by one or more other restricted partnerships, a
restricted percentage must be determined for each partnership in accordance with paragraph
20 above. The restricted percentage to be applied in the determination of Alberta crown
royalty is the greatest of the restricted percentages determined for all partnerships that
have ever held the interest. It should be remembered, however, that if the interest was
ever held, and disposed of, by a corporation that was a restricted corporation at the time
of disposition, there is no need to calculate restricted percentages as the interest is
tainted in its entirety.
- As discussed in paragraphs 12 to 14, the exempt status of a corporation can be
transferred to another corporation under certain circumstances. However, a corporation
will not be considered to be an exempt corporation if, in the opinion of the
Minister of Finance, the result of the acquisition of the exempt status by the corporation would
increase the amount of ARTC that would otherwise be determined under the Act. This applies
to a corporation that acquires all of the Alberta resource properties of an exempt
corporation after March 31, 1996 or to amalgamations described in paragraph 12 occurring
after March 31, 1996.
- As discussed in paragraph 11 above, an "exempt corporation" can include in
Alberta crown royalty all royalties relating to wells with a finished drilling date on or
before August 24, 1982. If control of an exempt corporation changes, the corporation will
be deemed not to be exempt if the change in control results in an increase in the
aggregate of ARTC otherwise determined. The loss of exempt status applies to the year in
which control changes and all subsequent years.
- If control of a restricted corporation changes, the restricted corporation may, for ARTC
purposes, be deemed to have disposed of and reacquired all the interests in production
from oil and gas wells that it holds at the date of control change. The application of
this deeming provision would result in royalties on production from finished wells in
which the restricted corporation holds an interest being henceforth excluded from Alberta
crown royalty. This deeming provision applies unless the Minister of Finance is satisfied
that the change in control did not result in an increase in global ARTC.
- If there is a change in control of a corporation (the "target corporation")
that is associated with a restricted corporation immediately before the change in control,
the target corporation is deemed to have been a restricted corporation immediately before
the date of control change. Then, the deeming provision described in the preceding
paragraph may apply to taint the interest held by the target corporation.
- If a new corporation is formed by the amalgamation of two or more predecessor
corporations, the predecessor corporations are deemed to have disposed of, and the new
corporation is deemed to have acquired, all the interests in production from oil and gas
wells in Alberta that the predecessors held and that became the property of the new
corporation. This deeming provision applies unless the Provincial Treasurer is satisfied
that the amalgamation did not result in an increase in the ARTC otherwise determined or
unless paragraph 28 applies.
- If a restricted corporation disposes of property to its parent corporation in a wind-up
to which subsection 88(1) of the federal Act applies, the property will not acquire
restricted property status simply by virtue of this particular disposition. If the
properties were restricted properties to the subsidiary, they will, of course, be
restricted properties to the parent.
- Similar relieving provisions apply where a disposition occurs by virtue of the
amalgamation of:
a) a restricted corporation and one or more of its wholly-owned subsidiaries;
b) two or more wholly-owned subsidiaries of the same parent corporation, at least one
of which is a restricted corporation; or
c) a parent corporation and a wholly-owned subsidiary that is a restricted corporation.
In these cases, properties do not become restricted resource properties by virtue of a
deemed disposition by a restricted predecessor corporation to the successor corporation
(as discussed in paragraph 26 above).
- If a restricted corporation disposes of an interest in production to an associated
corporation, the property does not become restricted by virtue of that disposition. The
acquiring corporation can then claim ARTC in respect of the production. However, the
acquiring corporation will be deemed to be a restricted corporation if it disposes of the
interest within the next 365 days.
- Where two persons have entered into a standard farm-out agreement in respect of a
particular well prior to the well being spudded, relief from the restricted resource
property rules may be possible on the dispositions of the working interest by the farmor
and farmee. The following conditions must be met before relief is granted:
a) the "farmor" disposes of a working interest in the well to the
"farmee" under the condition that the farmee incurs Canadian development
expense, Canadian exploration expense or acquires gas or oil well equipment in respect of
the well;
b) at the time of disposing of the working interest, the farmor reserves a gross
overriding royalty in respect of production from the well or retains a working interest, a
carried interest, or a net profits interest in the well; and
c) the farmor has the option to convert the royalty or interest described in (b) into a
working interest within 60 days of receiving written notification from the farmee that the
farmee has recovered the costs of drilling, equipping, completing and operating the well
through net proceeds of production from the well.
Providing these conditions are met, the dispositions of the working interests by the
farmor in (a) and by the farmee as a result of the exercise of the option described in (c)
will not be considered to be dispositions for purposes of establishing whether the
property is a restricted resource property.
Relief does not extend to wide-spread farm-out agreements.
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