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.
Principal Issues: Whether gains / losses realized by a partnership from a hedging activity may qualify for inclusion in the determination of the adjusted resource profits of a member of the partnership.
Position: Yes, provided the hedging relates to qualifying production of the partnership such that the gains / losses would be included in the adjusted resource profits of the partnership but only the extent of the members share of such profits.
Reasons: Consistent with the relevant provisions of the Act and Regulations.
October 13, 2004
Compliance Programs Branch Resources Industry Section
Industry Specialist Services A.A. Cameron
Christine Savage (613) 347-1361
Co-ordinator, Resource Industries
Attention: Zul Ladak
2004-006044
Hedging Gains / Losses of Partnership
We are writing in response to your query regarding our memorandum dated December 9, 2003, wherein we provided comments in regard to certain Oil & Gas Audit Issue Sheets (our file 2003-00297). In particular, you have expressed concern that, notwithstanding subsection 1206(3) of the Income Tax Regulations (the "Regulations"), a corporate partner may not be able to include hedging gains realized by the partnership in the determination of the partner's resource profits (since the partner does not actually operate the relevant well or mine, it may not have any "income from production"). On the other hand, due to the broad wording of subsection 1204(1.1) of the Regulations, you are of the view that hedging losses realized by the partnership would be deducted in the determination of the corporate partner's resource profits (since the hedging activity would presumably be related to a "resource activity").
Where a taxpayer is a member of a partnership, amounts such as the taxpayer's income or non-capital loss for a taxation year are required to be computed under certain assumptions contained in subsection 96(1) of the Income Tax Act (the "Act"). In particular, as if the partnership were a separate person resident in Canada and each partnership activity (including the ownership of property) were carried out by the partnership as a separate person and, essentially, a computation were made of the amount of each income or loss of the partnership from each source or from sources in a particular place for each taxation year of the partnership (assumed to be the same as its fiscal period). Under paragraph 96(1)(d) of the Act, each income or loss of the partnership for a taxation year is also to be computed under certain assumptions including [under subparagraph (d)(i)] that the Act be read without reference to paragraph 20(1)(v.1) thereof (the provision of the Act which provides for a deduction in respect of "resource allowance"[note, this exclusion is applicable to partnership fiscal periods that began after December 20, 1991]).
Paragraphs 96(1)(f) and (g) of the Act further provide that in determining amounts such as the partner's income or non-capital loss for a taxation year, the amount of the income or loss, respectively, of the partnership for a taxation year from any source or sources in a particular place are, essentially, to be treated as the income or loss, as the case may be, of the partner from such source or sources in a particular place, for the taxation year of the partner in which the partnership's taxation year (fiscal period) ends, to the extent of the partner's share thereof.
In addition, where a taxpayer is a member of a partnership at the end of a particular fiscal period of the partnership, for purposes of certain provisions of the Regulations (including section 1204 thereof regarding "resource profits"), paragraph 1206(3)(a) of the Regulations provides that:
...the resource profits of the partnership for the fiscal period, to the extent of the taxpayer's share thereof, shall be included in computing his resource profits for his taxation year in which the fiscal period ended; ...
The above provisions indicate that, while a deduction with respect to resource allowance is precluded in the determination of income or loss at the partnership level, such deduction (in respect of the partner's share of the resource profits of the partnership for the relevant taxation year) may be available in the determination of the income or loss of the partner. (Note, for taxation years that began on or before December 20, 1991, former subsection 1210(2) of the Regulations provided that a partner could not claim a resource allowance for resource profits included in computing a resource allowance by the partnership. The amendments to subsection 1210(2) of the Regulations were made applicable as of the same time as the amendment to subparagraph 96(1)(d)(i) of the Act referred to above and now clearly provide that any resource allowance in respect of resource profits of a partnership is to be claimed by the members of the partnership). They also indicate, essentially, that an income or loss of the partnership retains its "source" in the determination of the partner's income or loss. In our view, this legislative context provides a prima facie argument that amounts that can legitimately be included in the resource profits of the partnership are to be included, to the extent of the partner's share thereof, in the determination of a partner's resource profits.
We would, however, also note that the deduction potentially available to a taxpayer (including a partner in a partnership) under paragraph 20(1)(v.1) of the Act in respect of resource allowance is determined by a formula specified in subsection 1210(1) of the Regulations. This formula depends, in part, on the taxpayer's "adjusted resource profits" for the relevant taxation year with this amount, which may be negative or positive, being determined by another formula specified in subsection 1210(2) of the Regulations. Under item "A" to this latter formula, an amount is determined which would be the taxpayer's resource profits for the relevant year if certain assumptions were made. One such assumption, under paragraph (d) to item A, is that:
...each amount that is the taxpayer's share of the income or loss of a partnership from any source were not taken into account, ...
Item "B" to this formula then includes, in the determination of the taxpayer's "adjusted resource profits" for the relevant taxation year:
...the total of all amounts each of which is the taxpayer's share of the adjusted resource profits of a partnership for the year, as determined under subsection [1210] (3) or (4); ...
Subsection 1210(4) of the Regulations contains special rules relating to an "exempt partnership", which is defined in subsection 1206(1) of the Regulations and relates to certain partnerships where the taxpayer has been a member thereof throughout the period beginning on December 20, 1991.
Under subsection 1210(3) of the Regulations, where the taxpayer is a member of a partnership in a fiscal period of the partnership that began after December 20, 1991 and ends in a taxation year of the taxpayer, the taxpayer's share of the partnership's adjusted resource profits for the year is:
...the amount, which may be positive or negative, that could, if this subsection did not apply, reasonably be considered to represent the taxpayer's share of the partnership's adjusted resource profits for the fiscal period, determined on the assumption that each partnership is a taxpayer the fiscal period of which is a taxation year.
In any case, under either of subsections 1210(3) or (4) of the Regulations, item B in the calculation of the partner's "adjusted resource profits" for a particular taxation year is determined with reference to that partner's share of the partnership's "adjusted resource profits" for the fiscal period of the partnership ending in that taxation year.
In light of these factors [i.e. the amendments to subsection 1210(2) of the Regulations and subparagraph 96(1)(d)(i) of the Act which provide, for taxation years beginning after December 20, 1991, the resource allowance is to be claimed by the partners and that subsections 1210(3) or (4) of the Regulations specifically provide that the calculation of a partner's "adjusted resource profits" for a particular taxation year includes the partner's share of the partnership's "adjusted resource profits" for the fiscal period of the partnership ending in that taxation year], it is our view that where an amount of a hedging gain or loss in respect of qualifying production of a partnership is appropriately included in the determination of the "adjusted resource profits" of the partnership, such amount, to the extent to the partner's share thereof, would be included in the determination of the "adjusted resource profits" of the partner. In view of the precise wording of item B in the calculation of a partner's "adjusted resource profits" [as determined under subsection 1210(3) or (4) of the Regulations], we do not see any requirement that a partner actually operate the relevant well or mine or that the partner have any "income from production" from a source other than the partnership.
This memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We trust that our comments will be of assistance.
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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