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Tax
and Revenue Administration
Alberta
Corporate Tax Act
Interpretation Bulletin CTIB-2R1 |
| Last Reviewed: |
October 1998 |
| Produced by: |
Alberta Finance and Enterprise, Tax
and Revenue Administration |
| For more information: |
tra.revenue@gov.ab.ca |
CTIB-2R1 / October 1998
ALBERTA
CORPORATE TAX ACT INTERPRETATION BULLETIN:
ALBERTA ROYALTY TAX CREDIT TECHNICAL ISSUES
This Interpretation Bulletin discusses various interpretations of the law concerning
the Alberta Royalty Tax Credit ("ARTC"). General information relating to ARTC can be found in Information
Circular CT-18 entitled "Alberta Royalty Tax Credit". The topics discussed
in this Interpretation Bulletin include:
- The rules relating to the availability of ARTC to corporations are set out in sections
26 and 26.1 of the Alberta Corporate Tax Act (the "Act"). The basis for the
credit is Alberta crown royalty ("ACR") which is defined in section 26(1)(c) of
the Act. ACR is the aggregate of amounts, each of which:
a) is, or is in respect of, a royalty receivable by or payable to the Crown in right of
Alberta:
(i) under a lease or licence issued under the Mines and Minerals Act granting
petroleum rights, natural gas rights or petroleum and natural gas rights; or
(ii) in respect of an oil sands lease prescribed in section 5.3 of the regulations
under the Act; and
b) is required to be included in computing the corporation's income for the year or is
not deductible in computing the corporation's income for the year by virtue of paragraphs
12(1)(o) and 18(1)(m), respectively, of the federal Income Tax Act (the "federal
Act");
less
c) any amount which is a reimbursement, received by the corporation under the terms of
a contract, of an amount described above.
- In Alberta, the Crown takes its royalty in kind meaning the Crown has the right to a
certain portion of the production from a well which is the Crown royalty. The working
interest holder is required by paragraph 12(1)(o) to include in income an amount equal to
the value of the Crown's royalty.
- Section 26(1.1) of the Act provides that ACR does not include royalties relating to
restricted resource properties. There is an exception which is that exempt corporations
may include crown royalties relating to restricted resource properties described in
section 26(1)(h)(i). [This type of restricted resource property is an 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.] General information relating to restricted
resource properties is discussed in Part II of
Information Circular CT-18. Paragraphs 26 to 28 of this bulletin discuss some specific
interpretations related to whether a property is a restricted resource property.
- Under the Petroleum Royalty Regulation and the Natural Gas Royalty Regulation
to the Mines and Minerals Act, royalties are payable on production won, worked,
recovered or obtained. Therefore, royalties are included in ACR for the taxation year in
which the production occurs (which may or may not be the same as the year of payment). If
adjustments are made to royalties relating to production for a preceding taxation year, a
corresponding adjustment is required to ACR of that preceding year, rather than to the
year in which the adjustment is made.
- If there is a producing freehold oil well in a spacing unit offsetting a lease location,
the lessee may be required to commence drilling an offset oil well on the lease location
within 90 days of the freehold oil well coming into production. The lessee can elect to
instead pay a compensatory royalty based on production from the freehold oil well.
If the freehold well is a gas well, the Minister of Energy will send a notice requiring
that the lessee drill an offset gas well within 90 days of the notice. The lessee can also
elect in this situation to instead pay a compensatory royalty based on production from the
freehold gas well.
These royalties paid to Alberta pursuant to section 22 of the Petroleum
and Natural Gas Agreements Regulation, may be included in the calculation of Alberta
crown royalty.
- In some situations, an operating agreement may allow one or more parties ("the
participants") to drill an oil or gas well and another party to the agreement with an
interest in the property ("the penalty party") to choose not to participate in
the exploration and development costs and the risk associated with a new well. In return
for the participants assuming the risks and expenses of the new well, they receive
production from the well that would otherwise belong to the penalty party until a payout
figure is achieved. Generally, the agreement will provide that the participants retain
possession of the well and all production therefrom during the penalty production period
and that the participants shall pay all costs if the well is abandoned before penalty
payout is achieved. In addition, the agreement will provide that the participants pay all
royalties for which the penalty party would otherwise be liable and that the penalty party
does not dispose of its interest in the well.
It is industry practice to treat the
penalty production, which would otherwise be production attributable to the penalty
party's interest in the well, as the production of the participants. the Canada Revenue Agency ("CRA")
has
accepted this practise. TRA has also accepted this practise and, for ARTC purposes, crown
royalties paid on penalty production should be included in the participant's
ACR.
- For restricted resource property considerations, under the standard agreements, the
penalty party will not have disposed of its interest in the well. In most cases, the
agreements provide that the participants are entitled to retain possession of the well and
all production until penalty payout is achieved; however, once penalty payout is achieved,
the penalty party is entitled to receive production. The penalty party does not acquire
this right as the party always had the right but permitted the participants to take
production as compensation for drilling and developing the well. As there has been no
disposition of an interest or right by a restricted corporation, the penalty party can not
be said to have acquired a restricted resource property.
- Only royalties are included in ACR. "Royalty" is commonly used to indicate a
reservation by the owner of mineral rights on granting a right to explore for and take
minerals. As such, the following would not be included in ACR:
a) freehold mineral taxes;
b) lease rentals and bonuses;
c) interest on overdue royalties; and
d) penalties charged by Energy.
- Other exclusions from ACR include:
a) royalties to a government other than Alberta;
b) royalties in respect of production from wells on Indian reserves within Alberta (as
these are paid to the federal government);
c) royalties under agreements granting oil sands rights, bituminous sands rights or
coal rights except as provided for under section 5.3 of the Regulations;
d) royalties on sulphur paid in taxation years that either begin after 1982 or that end
prior to 1997; and
e) freehold royalties.
- The amount of capital cost deduction received by a corporation under Energy's new
royalty system must be allocated by the corporation to each interest in production on
Crown leases on a reasonable basis. The allocation must reflect a reasonable allocation
between restricted resource properties and non-restricted resource properties. In
determining the net royalty amount to be included in ACR for a particular property, the
capital cost deduction allocated to that property is then deducted from the gross royalty
paid on production from that property.
- The amount to be included in ACR for petroleum royalty is net of any transportation
allowance received from the Crown.
- Beginning in 1994, each royalty client (that is, an entity responsible for reporting
crown royalties to Alberta Energy) is required to maintain a deposit equal to 1/6 of the
dollar value of the total net Crown royalty paid in the preceding year. The initial
deposits were paid in February and March of 1994 and may be adjusted if the royalty
client's business has increased or decreased within Alberta Energy's guidelines. The
amount paid as a deposit is merely an administrative amount required by Alberta Energy
and, therefore, is not Alberta crown royalty as the amount is not paid in relation
to specific production.
- In some enhanced oil recovery projects, it is necessary to inject into the reservoir,
gas and gas products (herein called "gas"). After some time, that gas will be
recovered from the project although it may be mixed into a number of different
combinations with the products native to the reservoir. At the time that it is
recovered/reproduced, the gas attracts royalties. Prior to 1994, royalties on the injected
gas were already paid at the time that the gas was originally produced unless the
production met the conditions for a waiver or exemption of royalties.
In order to
eliminate the duplication of royalties on the same gas, a system was developed whereby the
volumes of royalty-paid gas injected were tracked in a "royalty paid bank". A
separate bank was established for each type of gas or gas product. The banks were recorded
in the names of the clients involved in the bank in their proportionate share. The volumes
of gas recovered from the project were offset against the bank and the client did not pay
royalties until the bank was depleted.
- Alberta Energy changed its royalty programs for gas royalties recovered after December
31, 1993. As part of that change, clients receive a credit for the royalty banks since the
new system does not provide for a similar royalty paid bank offset and all gas recovered
is subject to royalties.
The balance of all royalty paid banks was established at
December 31, 1993. After that date, the banks could be drawn down in one of two ways:
a) If the total royalty paid bank is less than $100,000, the bank was extinguished
through a one-time credit to the royalty client accounts on the January 1994 invoice. The
credit was determined in the same manner as if the gas was produced and subject to Crown
royalty in January 1994.
b) Banks in excess of $100,000 are generally amortized over a 72-month period. Each
month, the amortization amount is credited to the royalty client accounts until the bank
is extinguished.
- The royalty bank credits are to be treated as a reduction of Alberta crown royalty for
the month in which the credit is shown. For example, the credit for January 1994 reduces
the total ACR paid for that month, and thus reduces the amount of royalty on which ARTC is
based for the January 1994 production month.
- Unitization provides a co-ordinated management of interests in developing or producing
oil and gas properties. It involves merging, pooling, consolidating, or integrating a
number of tracts into "units" without regard to the boundaries of the separate
tracts. The formation of a unit is not considered to involve the acquisition or
disposition of resource properties; hence, it does not, in and of itself, give rise to
restricted resource property.
- Under the typical unit agreement, unit production is allocated to each tract in the unit
and the amount so allocated is deemed to have been produced from that tract, whether or
not there are wells on that tract. Alberta crown royalties on production allocated to a
particular tract are payable by working interest unit holders who contributed that tract
to the unit. Further, unit operations, including the drilling of wells, are typically
deemed by the agreement to have been conducted by all the working interest holders that
are party to the unit agreement.
- For purposes of evaluating the application of the restricted resource property rules to
unitized interests, once it is formed, the unit may be regarded as a direct lease and each
unit holder regarded as a participant in that direct lease. Then, the eligibility for ARTC
of royalties relating to production allocated to a particular unit interest may be
determined according to the rules and concepts discussed in Information Circular CT-18. For instance, any production
allocated to a corporation's unit interest that comes from a unit well with a finished
drilling date after the corporation acquired its interest would not be from a restricted
resource property.
- Section 256 of the federal Act (which is adopted by section 1(1) of the Act) sets out
the circumstances under which two or more corporations are associated. Section 26(2) of
the Act provides that when corporations are otherwise associated in a particular taxation
year under the Act, only those corporations that have ACR in the relevant taxation year
are associated for ARTC purposes.
- An associated group is limited to a $2,000,000 crown royalty shelter which is subject to
adjustment for short taxation years if all corporations in the associated group have a
taxation year of less than 365 days. The crown royalty shelter will also be adjusted if
any member of the associated group:
a) has a taxation year that straddles December 31, 1994,
or
b) is a participant in a partnership with a fiscal period that straddles December 31,
1994.
- If two or more corporations become associated during the taxation year, the effect is
the same as if they were associated throughout the taxation year.
- Corporations not associated under the provisions of the federal Act but which have ACR
may be deemed to be associated for ARTC purposes by a direction of the Minister of Finance. The circumstances under which a direction could be made are:
a) if the Minister of Finance is satisfied that the separate existence of the
corporations is not solely for the purpose of carrying out business in the most effective
manner and one of the main reasons for the separate existence is to increase the amount of
ARTC that could be claimed;
b) if two or more corporations, in the opinion of the
Minister of Finance, have
entered into an arrangement that lacks any substantial business purpose other than
increasing the total ARTC that may be claimed or an arrangement that artificially
increases the ARTC that may be claimed; or
c) if the Minister of Finance is satisfied that the separate existence of two or more
corporations is not solely for the purpose of carrying out business in the most effective
manner and one of the main reasons for the separate existence is to avoid one or more of
those corporations remaining or becoming a restricted corporation.
- If a direction is made under the circumstances described in paragraph 22, all of the
corporations involved would be restricted corporations at the date of disposition of a
working interest or at any other particular time if their combined ACR for their latest
taxation years ending before that time exceeded the crown royalty shelter applicable at
that time.
- If there has been an acquisition of control and the
Minister of Finance is satisfied
that as a result of this acquisition of control there is an increase in the aggregate
amount of ARTC to which a corporation or group of corporations is entitled, section
26.1(7.1) of the Act provides for a determination by the Minister of Finance
of the ARTC
without regard to allocations agreed to by the subject corporations. This section applies
only to taxation years ending in the calendar year in which control was acquired.
- Section 26.1(7.2) provides similar discretionary powers where a corporation has a short
taxation year, whether by reason of amalgamation or other reasons, such as a permitted
change of year end. The Minister of Finance may determine the ARTC of the corporation
with the short taxation year, of its associated corporations and, in the case of
amalgamation, of the successor corporation. This applies only to taxation years ending in
the same calendar year as the short taxation year.
Advance income tax rulings may be
provided, upon request, to corporations wishing to know how the Minister of Finance's
discretionary powers will be applied to transactions that the corporation is proposing to
complete. For information on how to request an advance income tax ruling, see Information Circular CT-12 entitled "Advance Alberta
Corporate Income Tax Rulings".
The following discussion focuses on specific situations encountered by TRA in the
application of the restricted resource property rules.
- As stated in paragraph 3, except as provided by section 26(1.1) of the Act, ACR does not
include royalties relating to restricted resource properties. The term "restricted
resource property" is defined in section 26(1)(h) of the Act. A restricted resource
property is any right or interest (of any nature whatsoever or howsoever described or part
thereof) in any production from a well in Alberta:
a) with a finished drilling date on or before August 24, 1982, where that right
or interest was owned by an above-limit corporation or above-limit partnership after
August 24, 1982 (with exception made for properties acquired pursuant to certain contracts
entered into and enforceable on or before that date);
or
b) that was disposed of after its finished drilling date and after April 7, 1986 by a
restricted corporation or by a restricted partnership.
- It is common for an interest that is a restricted resource property to be acquired and
subsequently the well-bore is reworked by the purchaser to a new producing zone. If a
new finished drilling date is established for the well, the interest is no longer
restricted. This may occur when horizontal drilling, vertical drilling, whipstocking
or re-entry of a well is done. However, regardless of the work done on the well, unless a
new finished drilling date is established, the interest is still a restricted resource
property.
- A corporation that is above-limit or restricted may sell resource properties to a
partnership in exchange for a partnership interest. The sale of these properties is
subject to the restricted resource property rules, so that any property meeting the
definition becomes a restricted resource property upon sale to the partnership. Any
royalties allocated by the partnership to the partners can not be included in the
partners' ACR except that partners which are exempt corporations may include in their ACR
royalties relating to restricted resource properties described in paragraph 26(a) above.
- There is often difficulty in determining the transfer date when resource properties are
sold. In some cases, the parties to the sale state that the transfer actually occurs on an
"effective date" established in the sale agreement while in other cases, the
parties state that the transfer actually occurs on the "closing date". The
transfer date is of vital importance in determining who is responsible for the royalties
for the time period between the effective and closing dates and, therefore, who would be
eligible to claim ARTC on those royalties.
- To help in determining the transfer date, the following guidelines are provided. The
transfer of the property is considered to occur when all of the following conditions have
been met:
a) the agreement is absolute;
b) the incidents of beneficial ownership of the property including possession, use, and
risk pass to the purchaser;
c) all third party approval or ratification, if required, has been obtained or
received;
d) any conditions to which the sale is subject have been addressed and completed;
e) the vendor is entitled to the proceeds from the sale;
f) there are no further purchase price adjustments; and
g) all of the required steps and procedures had been followed to make the sale
transaction valid and complete in law.
A determination of the transfer date of a transaction must be based on the facts of
that particular case.
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