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:
Whether upgraded XXXXXXXXXX is beyond the prime metal stage or its equivalent for purposes of 125.1(3) of the Act and ss 1204(1) of the Regulations.
Position:
No
Reasons:
Custom, normal commercial purity, and principal end use;
Agree with opinion provided by Natural Resources Canada.
XXXXXXXXXX 970445
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Rulings
This is in reply to your letter of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-referenced taxpayers in connection with the proposed transactions described below and is further to your letters dated XXXXXXXXXX and our telephone conversations on this matter.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
FACTS
In this letter:
"impurities" means, collectively, XXXXXXXXXX and other impurities;
"mineral I" means XXXXXXXXXX;
"mineral II" means XXXXXXXXXX;
"mineral III" means XXXXXXXXXX;
"more impurities" means, collectively, XXXXXXXXXX and other impurities;
"ore" means XXXXXXXXXX ore, which is primarily a coarse composition of the XXXXXXXXXX;
"ore deposit" means XXXXXXXXXX;
"particular producers" means XXXXXXXXXX producers;
"process A" means the XXXXXXXXXX process;
"process B" means the XXXXXXXXXX process;
"regular product" means XXXXXXXXXX, which is one of the products obtained by processing ore and which contains approximately XXXXXXXXXX% of mineral II equivalent to approximately XXXXXXXXXX% of mineral III;
"Resource Co". means XXXXXXXXXX;
"Resource Co.'s predecessor" means a corporation which was the predecessor of Resource Co. and which amalgamated with its parent, XXXXXXXXXX;
"step 1" means XXXXXXXXXX treating ore to achieve
XXXXXXXXXX
"step 2" means XXXXXXXXXX;
"step 3" means
XXXXXXXXXX
and
"upgraded product" means the product obtained after step 3 by processing ore and which contains approximately XXXXXXXXXX% of mineral II equivalent to approximately XXXXXXXXXX% of mineral III.
Resource Co. exploits an ore deposit in Canada. Resource Co.'s predecessor's business number XXXXXXXXXX.
Resource Co's head office is in XXXXXXXXXX and its tax returns are handled by the XXXXXXXXXX Taxation Centre and the XXXXXXXXXX Tax Services Office.
Resource Co. extracts ore from the ore deposit. Resource Co. transports the ore to XXXXXXXXXX, where Resource Co. operates a XXXXXXXXXX complex.
Resource Co.'s ore deposit qualifies as a "mineral resource" as defined in paragraph (a) of that definition in subsection 248(1) of the Income Tax Act (the "Act") and the Income Tax Regulations (the "Regulations").
The ore undergoes a number of operations to separate its two main constituents, mineral I and mineral II.
One of the products obtained by the actual processing is regular product. It is sold to particular producers who use process A.
Currently, the market for mineral II is divided in two main sectors, i.e., process A and process B. The regular product is sold to particular producers that are using process A. Other than mineral II, the regular product contains several other metal and non-metal particles as well as impurities that prevent its use by particular producers using process B.
Worldwide, producers of regular product are experiencing significant changes due to new market requirements. For various reasons, but, among others, the general cleaner process and more favourable impact on the environment, the market demands more upgraded product, and less regular product, which can only be used with process A. Since its initial development in XXXXXXXXXX, upgraded product has won rapid acceptance by the particular producers. In 1986, upgraded product held a XXXXXXXXXX% share of the world market; in 1996, it held XXXXXXXXXX% of the world market and it is predicted that it will hold XXXXXXXXXX% of the world market in 2006. No new plants are being built in the world by particular producers using process A.
PROPOSED TRANSACTIONS
The construction of new plant facilities started in XXXXXXXXXX and is expected to end in XXXXXXXXXX.
In XXXXXXXXXX, Resource Co. will carry on business operations in the new plant facilities XXXXXXXXXX to convert its regular product into an upgraded product to be sold to the particular industry using process B.
The upgraded product process is proprietary to Resource Co. and involves specific parameters for conditioning regular product so that it can be XXXXXXXXXX to remove impurities to make the resultant product usable in process B.
The regular product is sized in a range to meet the most desirable particle size specifications for process B feedstock. It is then treated sequentially by step 1, step 2 and step 3.
The upgraded product has the same end use as the regular product: as a raw material for the production of mineral II in the particular industry. Although its purity and constituents have changed, the upgraded product is not yet suitable for manufacturing.
To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this request are being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed, and none of the issues are under appeal or objection.
Purpose of Proposed Transactions
The purpose of carrying on operations to convert the regular product into upgraded product is for Resource Co. to retain market share, to fulfil the market demand for upgraded product, and to access the emerging process B market. The process for converting the regular product to the upgraded product will also enable Resource Co. to compete with other worldwide mineral II suppliers, some of which obtain upgraded product without undergoing a process such as the upgraded product process, simply because of the higher purity level of their ore, and can sell their product directly to process B particular producers.
RULINGS
Provided that the preceding statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and the purpose thereof, and that the proposed transactions are carried out as set forth herein, the following rulings are given:
Resource Co.'s income for a taxation year from the production and processing, referred to in this letter, of ore from Resource Co.'s ore deposit to produce upgraded product will not be considered production and processing of the ore to a stage that is beyond the prime metal stage or its equivalent for the purposes of subparagraph (b)(ii) of the definition "gross resource profits" in subsection 1204(1) of the Regulations.
The processing at the new plant facilities, referred to in this letter, by Resource Co. of the ore from Resource Co.'s ore deposit to produce upgraded product will not be considered processing to a stage that is beyond the prime metal stage or its equivalent for the purposes of paragraph (f) of the definition "manufacturing and processing" in subsection 125.1(3) of the Act:
The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and are binding on Revenue Canada provided the business operations described in paragraph 11 begin by XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.
Yours truly,
Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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