Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Will costs to drill a new well into a producing field qualify as "designated underground storage costs" for the purposes of Class 10(f.1) and Class 41, as the term is defined in Regulation 1104(2).
Position TAKEN:
Designated underground storage cost does not include costs for drilling a well for the production of natural gas or petroleum.
Reasons FOR POSITION TAKEN:
CDE includes cost to drill oil or gas wells. Thus if a cost is incurred to develop a licensed underground storage property, that drilling expense will be considered to be designated underground storage cost because the purpose was not to produce petroleum or natural gas and the well is not an oil or gas well under the definition in 248(1).
XXXXXXXXXX 5-942328
Attention: XXXXXXXXXX
January 31, 1994
Dear Sirs:
Re: Designated Underground Storage Costs
This is in reply to your letter of August 30, 1994 wherein you requested our opinion on whether a cost in respect of drilling a well would be "designated underground storage cost" ("DUSC") within the meaning of the expression under subsection 1104(2) of the Income Tax Regulations (the "Regulations") for the purposes of Class 10(f.1) and Class 41 of Schedule II to the Regulations, or whether such cost would be Canadian development expense ("CDE") within the meaning of the expression under subsection 66.2(5) of the Income Tax Act (the "Act"), in the following hypothetical situation. We apologize for the delay in responding to you.
In this regard we provide you with the following general comments which may be of assistance to you. Our comments, however, should not be construed as confirming the income tax consequences for a particular transaction.
In a hypothetical situation, a new natural gas well is drilled into an existing underground natural gas storage facility which is located in a producing natural gas field, in order to enhance the injection and withdrawal capabilities of the storage facility. Hence, additional natural gas of a third party can be stored in such facility.
1.It is always a question of fact as to whether a cost in respect of drilling a new well is CDE or DUSC, depending on the purpose of incurring such cost.
2.According to the definition in subsection 1104(2) of the Regulations, " designated underground storage cost" means:
any cost incurred by him after December 11, 1979 in respect of developing a well, mine or other similar underground property for the storage in Canada of petroleum, natural gas or other related hydrocarbons.
It is our understanding that in the Province of Alberta, a licence or approval by a provincial regulatory body is required for an underground natural gas storage facility and any further development thereto. By analogy to the case of Bunge of Canada Ltd. v. Her Majesty The Queen, 84 DTC 6276 (FCA), storage of natural gas includes injection and withdrawal of natural gas to or from the storage facility, as the case may be. Accordingly, a cost in respect of drilling a new well into an existing licensed underground natural gas storage facility in order to enhance the injection and withdrawal capabilities of such storage facility, would appear to be for storage purposes and, as such, would generally be considered as DUSC and not CDE, provided that such new well is not considered as an "oil or gas well" within the meaning of the expression under subsection 248(1) of the Act. Where a well would meet both of the purpose test under the definition of "designated underground storage cost" in subsection 1104(2) of the Regulations and that under the definition of "oil or gas well" in subsection 248(1) of the Act, we need more information and facts in order to make a determination.
3.The Class 41 CCA deductions in respect of the above-noted natural gas storage facility would generally be excluded from the calculation of resource profits under subsection 1204(1) of the Regulations, provided that such facility is not used in the business of production of natural gas.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 21 of Information Circular 70-6R2, the above comments do not constitute an advance income tax ruling and accordingly are not binding on the Department.
Yours truly,
for A/Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Policy and Legislation Branch
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