Depletion Allowances

19.A62. A taxpayer operating certain classes of mine may deduct one-third of all his profits for the taxation year reasonably attributable to production from the mine. The classes of mine are:

  • (a) oil and gas wells;
  • (b) bituminous sand deposits;
  • (c) base and precious metal mines; and
  • (d) certain specified mineral deposits.

This excludes industrial minerals contained in bedded deposits (for example, sand and gravel pits, salt and stone quarries). ‘Operator’ includes a person who carries on extracting operations, persons who have an interest in the proceeds of production or a right to share in profits.

19.A63. A ‘non-operator’ who receives a rental or royalty or otherwise has an interest in production from a mine is entitled to a deduction equal to 25 per cent of the amount included in computing his income.

19.A64. Where the output of gold is 70 per cent or more of the aggregate output from all the mines operated by the taxpayer, the deduction allowed is the greater of (i) 40 per cent of the aggregate of the net profits reasonably attributable to all mines owned by him, or (ii) $4.00 per ounce of gold produced in the year.

19.A65. The computation of ‘production’ requires deduction from production profits of all production losses or outgoings, exploration and developmental expenses otherwise deductible, the capital cost allowance (referred to below), exempt income, and any interest paid on the purchase price of property used for exploration or production purposes. It would appear that this allowance tends to favour the profitable mining venture. A deduction equal to 10 cents per ton of coal mined is granted to a taxpayer who operates a coal mine.

19.A66. Until the end of 1973, a mine was granted a ‘tax holiday’ whereby its income was exempt for a three-year period commencing when the mine came into reasonable commercial production.

19.A67. After 31 December 1976 the depletion allowance (permitted under section 65(1) of the Act) will be computed on an ‘earned depletion’ basis under which, in general, taxpayers are entitled to deduct in computing income $1.00 for each $3.00 of specified eligible expenditures incurred by them after 7 November 1969. The automatic deduction allowed to operators and non-operators of (respectively) one-third and one-quarter of production profits will cease to apply. All taxpayers will be entitled to deduct one-third of their ‘resource profits’ for the year to the extent of their earned depletion base at the end of the year. The term ‘resource profits’ will include profits from the kinds of activities which prior to 1977 would attract the depletion allowance. Only where the taxpayer has incurred qualifying expenditures after 7 November 1969 will he be entitled to a depletion allowance.

19.A68. Thus, any expenditure incurred in exploration for and development of minerals, oil and gas wells is a constituent of the earned depletion base which forms the ceiling limit of the depletion allowance.

19.A69. It appears that the purpose of the amendments was to promote a direct relationship between the extent of expenditure on exploration and development and

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the quantum of the incentive being offered: the previous system of depletion allowances under which deductions were related to profits or the volume of production was said to encourage exploration and development only indirectly. The deduction is designed to operate as a pure incentive and not merely to recognise expenses that ought to be taken into account in accurately measuring income.

19.A70. Certain categories of expenditure are not included in the ‘earned depletion base’. These are the cost of a Canadian resource property, interest on money borrowed for the purpose of exploration, prospecting or development and post-production exploration and development expenditure. The cost of ‘processing property’ is included in the earned depletion base: this encompasses all plant employed in processing mineral ores up to the prime metal stage or its equivalent.