Freehold mineral rights owned by individuals or corporations are considered to be ‘Canadian Resource Property’ for purposes of the Canadian Income Tax Act (the “Act”).
Payments received from a Canadian Resource Property are taxed as income. Expenses incurred in exploring, developing or acquiring a Canadian Resource Property may be deducted from income. These deductions are accomplished through ‘tax pools’. The tax pools applicable to Canadian Resource Property are Canadian Exploration Expense (“CEE”), Canadian Development Expense (“CDE”) and Canadian Oil and Gas Property Expense (“COGPE”). Freeholders typically lease their freehold mineral interests to an energy company and, because all exploratory and development expenses are incurred by that energy company, CEE and CDE are usually not relevant to freehold owners. But freehold owners may incur expenses in acquiring their mineral rights. Costs incurred to acquire an interest in freehold minerals are included in a freeholder’s COGPE pool in the year of acquisition. Generally, the amounts in a freehold owner’s COGPE pool may be deducted from the freeholder’s income on a 10% declining balance basis (for example, if your freehold mineral interests were acquired for $10,000, you could deduct $1,000 from your income in the first year, $900 in the second, $810 in the third, etc.). The foregoing applies irrespective of whether you actually purchased the freehold minerals for cash or inherited them as the beneficiary of an estate in which tax was paid under the deemed disposition rules (see below).
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