2014-0522241I7 T1135: Mineral rights situated outside of Canada

Principal Issues: Whether mineral rights situated outside of Canada held by a taxpayer is considered “real property” for T1135 purposes.

Position: Yes, provided the property is not held exclusively in the course of carrying on an active business.

Reasons: Mineral rights of a reporting entity situated outside of Canada are considered tangible property that is specified foreign property for purposes of section 233.3 of the Act.

Author: Ouimet, Jennifer
Section: 233.3(1), 248(1) “cost amount”

                                                                                   October 5, 2015

      Jyoti Lal                                                                HEADQUARTERS
      Compliance Programs Branch                             Income Tax Rulings
      International and Large Business Directorate      Directorate

                                                                                    2014-052224

      T1135 – Mineral rights situated outside of Canada

We are writing in reply to your email of February 27, 2014, requesting our views on whether the right to mine minerals in the US would be considered “specified foreign property” as defined in subsection 233.3(1) of the Income Tax Act (the “Act”), and must therefore be reported on Form T1135, Foreign Income Verification Statement. We apologize for the delay in responding.

You have asked for our comments concerning whether the right to mine minerals situated outside of Canada would be considered “real property” for T1135 reporting purposes, and if so how the “cost amount” for such property would be determined.

Our Comments

A taxpayer is required to report specified foreign property on Form T1135, where the total cost amount of all such property exceeds $100,000. Specified foreign property includes, among other things, tangible property situated outside Canada pursuant to paragraph (b) of the definition of “specified foreign property” in subsection 233.3(1) of the Act. Property that is an interest in, or convertible into or exchangeable for property that is specified foreign property, is also specified foreign property pursuant to paragraphs (h) and (i), respectively, of that definition.

The right to mine for minerals in a mineral resource outside of Canada falls within subparagraph (b)(ii) of the definition of “foreign resource property” in subsection 248(1) of the Act.  For such rights to be considered specified foreign property, the right would have to be tangible property pursuant to paragraph (b) of the definition of specified foreign property, or alternatively, a right to any property that is specified foreign property, pursuant to paragraph 233.3(1)(h) of the Act.

The expression “tangible property” is not defined in the Act.  Such term is understood to include real property, which generally refers to land and rights issuing out of, annexed to and exercisable within or about land (for example, a fee simple in land and a profit-à-prendre in respect of minerals).  As such, it is our view that the right of a reporting entity to mine minerals in a mineral resource outside of Canada would be considered tangible property that is specified foreign property for purposes of section 233.3 of the Act.

It remains a question of fact, however, whether mineral rights held outside of Canada would be considered capital property or property held exclusively in the course of carrying on an active business. A property that is used or held exclusively in the course of carrying on an active business is excluded from the definition of specified foreign property pursuant to paragraph 233.3(1)(j) and would not be reported on Form T1135.

With respect to the cost amount of the mineral rights, the CRA has a longstanding position that the cost amount of foreign resource property is nil. Therefore, in determining whether a taxpayer is a reporting entity for T1135 purposes, the mineral rights have a cost amount of nil. However, in our view, if a taxpayer has sufficient other specified foreign property to exceed the $100,000 threshold, the CRA could require that a more useful amount be reported (for example, acquisition cost).

For your information, unless exempted, a copy of 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, following a 90-day waiting period (unless advised otherwise to extend this waiting period), 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 the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be e-mailed to: ITRACCESSG@cra-arc.gc.ca. In such cases, a copy will be sent to you for delivery to the taxpayer.

We trust our comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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