Frontier Lands Petroleum Royalty Regulations

Link to law: http://laws-lois.justice.gc.ca/eng/regulations/SOR-92-26/FullText.html

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Frontier Lands Petroleum Royalty Regulations

SOR/92-26CANADA PETROLEUM RESOURCES ACT
Registration 1991-12-12
Frontier Lands Petroleum Royalty Regulations
P.C. 1991-2470  1991-12-12Whereas, pursuant to subsection 107(2) of the Canada Petroleum Resources ActFootnote *, a copy of the proposed Regulations respecting royalties on petroleum produced from frontier lands was published in the Canada Gazette Part I on April 27, 1991 and a reasonable opportunity was thereby afforded to interested persons to make representations to the Minister of Energy, Mines and Resources and the Minister of Indian Affairs and Northern Development with respect thereto;
Return to footnote *R.S., c. 36 (2nd Supp.)
Therefore, His Excellency the Governor General in Council, on the recommendation of the Minister of Energy, Mines and Resources and the Minister of Indian Affairs and Northern Development, pursuant to sections 4 and 74 and paragraph 107(1)(b) of the Canada Petroleum Resources ActFootnote *, is pleased hereby to revoke the Frontier Lands Petroleum Royalty Regulations, 1987, made by Order in Council P.C. 1988-1325 of June 30, 1988Footnote **, and to make the annexed Regulations respecting royalties on petroleum produced from frontier lands, in substitution therefor.
Return to footnote **SOR/88-348, 1988 Canada Gazette Part II, p. 29201 [Repealed, SOR/2008-96, s. 2]
Previous Version

Interpretation

2 (1) In these Regulations,

abandonment and restoration

abandonment and restoration means activities, in respect of wells, production infrastructure and geological, geophysical and geochemical operations that were allowed capital costs of the project, relating to

(a) the abandonment of a well,
(b) the destruction, scrapping, removal, disassembling and decommissioning of production infrastructure,
(c) the renewing, repairing, cleaning-up, remediation or other management of soil, water or sediment to the extent that the damage is consistent in scope and magnitude with any damage to the environment that would reasonably be expected where activities are conducted using good production practices so that the functions and qualities of the soil or water are comparable to those of its original, unaltered state, and
(d) the monitoring of the effectiveness of the activities referred to in paragraphs (a) to (c); (abandon et restauration)

abandonment and restoration royalty trust
abandonment and restoration royalty trust means a trust certified under section 7; (fiducie de redevances pour l’abandon et la restauration)
Act
Act means the Canada Petroleum Resources Act; (Loi)
adjusted cumulative cost base
adjusted cumulative cost base[Repealed, SOR/2008-96, s. 3]
adjusted gross revenues
adjusted gross revenues[Repealed, SOR/2008-96, s. 3]
allocated
allocated[Repealed, SOR/2008-96, s. 3]
allowed capital costs

allowed capital costs of an interest holder of a production licence in relation to a project in respect of any month means, if there is only one interest holder, the allowed capital costs of the project or, if there is more than one interest holder, the allowed capital costs of the project attributed to that interest holder, that are

(a) described in and calculated in accordance with Schedule I, and
(b) incurred in that month; (coûts en capital déductibles)

allowed operating costs

allowed operating costs of an interest holder of a production licence in relation to a project in respect of any month means, if there is only one interest holder, the allowed operating costs of the project or, if there is more than one interest holder, the allowed operating costs of the project attributed to that interest holder, that are

(a) described in and calculated in accordance with Schedule I, and
(b) incurred in that month; (frais d’exploitation déductibles)

attributed
attributed means allocated in accordance with an applicable allocation agreement or reasonably allocated if no allocation agreement exists; (attribué)
capital cost adjustment

capital cost adjustment of an interest holder of a production licence in relation to a project means

(a) in respect of a month preceding the month in which the project commencement date falls, an amount equal to five per cent of the allowed capital costs of the interest holder in relation to the project in respect of that month, and
(b) in respect of the month in which the project commencement date falls and any month after that month, an amount equal to one per cent of the interest holder’s allowed capital costs in relation to the project in respect of that month, other than any amounts considered under subsection (2) to be an interest holder’s allowed capital cost in relation to the project in respect of the following month; (rajustement du coût en capital)

contribution deferral balance
contribution deferral balance of an interest holder of a production licence in relation to a project in respect of any month means the amount, if any, by which the aggregate, for that month and all preceding months, of all contributions used to defer an amount of royalty under section 6 exceeds the withdrawal of those contributions under section 6.1; (solde des apports servant au report de redevances)
cumulative adjusted gross revenues
cumulative adjusted gross revenues[Repealed, SOR/2008-96, s. 3]
cumulative capital cost adjustments
cumulative capital cost adjustments of an interest holder of a production licence in relation to a project in respect of any month means the aggregate of the capital cost adjustments of the interest holder for that month and the preceding months; (montant cumulatif des rajustements des coûts en capital)
cumulative cost base
cumulative cost base[Repealed, SOR/2008-96, s. 3]
cumulative costs

cumulative costs of an interest holder of a production licence in relation to a project in respect of any month means, subject to any adjustments arising from section 8, the aggregate of

(a) the interest holder’s allowed capital costs in relation to the project for that month and the preceding months,
(b) the interest holder’s allowed operating costs in relation to the project for that month and the preceding months,
(c) the royalty payable by the interest holder in that month and the preceding months in respect of petroleum produced from the project lands,
(d) the cumulative capital cost adjustments in respect of the costs referred to in paragraph (a),
(e) the cumulative operating cost adjustments in respect of the costs referred to in paragraph (b), and
(f) the interest holder’s cumulative return allowance in relation to the project in respect of that month; (montant cumulatif des coûts)

cumulative gross revenues
cumulative gross revenues of an interest holder of a production licence in relation to a project in respect of any month means the aggregate of the gross revenues of the interest holder in respect of that month and the preceding months; (montant cumulatif des revenus bruts)
cumulative operating cost adjustments
cumulative operating cost adjustments of an interest holder of a production licence in relation to a project in respect of any month means the aggregate of the operating cost adjustments of the interest holder for that month and the preceding months; (montant cumulatif des rajustements des frais d’exploitation)
cumulative return allowance
cumulative return allowance of an interest holder of a production licence in relation to a project in respect of any month means the aggregate of the return allowances for the months preceding that month; (montant cumulatif de l’allocation de rendement)
delineation well
delineation well means a well that is so located in relation to another well penetrating an accumulation of petroleum that there is a reasonable expectation that another portion of the accumulation will be penetrated by the first-mentioned well and that the drilling of the first-mentioned well is necessary in order to determine the commercial value of the accumulation; (puits de délimitation)
development plan
development plan means a development plan or an amended development plan approved pursuant to the Canada Oil and Gas Operations Act; (plan de mise en valeur)
development well
development well means a well that is so located in relation to another well penetrating an accumulation of petroleum that it is considered to be a well or part of a well drilled for the purpose of production or observation or for the injection or disposal of fluid into or from the accumulation; (puits d’exploitation)
discovery well
discovery well means the well drilled on a geological feature that indicates that a significant discovery has been made; (puits de découverte)
exploratory well
exploratory well means a well drilled on a geological feature on which a significant discovery has not been made; (puits d’exploration)
facility
facility means a gas plant or a transportation facility; (installation)
gas plant
gas plant means a facility for processing transportable petroleum by any process, including absorption, adsorption and refrigeration, designed to recover residue gas or gas plant products; (usine de traitement du gaz)
gross revenues
gross revenues of an interest holder of a production licence from petroleum produced from project lands means the gross revenues of the interest holder as determined in accordance with Schedule II; (revenus bruts)
Her Majesty
Her Majesty means Her Majesty in right of Canada; (Sa Majesté)
inflation index
inflation index means the monthly Consumer Price Index as published by Statistics Canada under the authority of the Statistics Act; (indice d’inflation)
investment royalty credit
investment royalty credit of an interest holder means twenty-five per cent of that portion of the qualified frontier exploration expenses claimed by the interest holder as Canadian exploration expenses under the Income Tax Act, as amended from time to time, and certified by the Minister pursuant to subsection 10(3); (crédit de redevance à l’investissement)
investment royalty credit balance
investment royalty credit balance of an interest holder in respect of a month means the amount, if any, by which the aggregate of all of that interest holder’s investment royalty credits exceeds the aggregate of all amounts deducted under subsection 3(3) in respect of the months preceding that month; (solde du crédit de redevance à l’investissement)
long-term government bond rate
long-term government bond rate in respect of any month means the average percentage yield, during the calendar year immediately preceding the calendar year in which that month falls, of securities issued by the Government of Canada maturing in over ten years, as published by the Bank of Canada in the Bank of Canada Review; (taux des obligations à long terme du gouvernement)
marketable condition
marketable condition[Repealed, SOR/2008-96, s. 3]
month of payout
month of payout of an interest holder of a production licence in relation to a project means the first month in respect of which the interest holder’s cumulative gross revenues in relation to the project are equal to or greater than the interest holder’s cumulative costs in relation to the project; (mois de recouvrement de l’investissement initial)
net revenues

net revenues of an interest holder of a production licence in relation to a project in respect of a month means the amount by which the interest holder’s gross revenues in that month exceed the aggregate of the interest holder’s

(a) allowed capital costs in relation to the project in respect of that month,
(b) allowed operating costs in relation to the project in respect of that month,
(c) capital cost adjustment in relation to the project in respect of that month, and
(d) operating cost adjustment in relation to the project in respect of that month; (revenus nets)

non-qualifying expense

non-qualifying expense means an expense

(a) that is a Canadian exploration and development overhead expense within the meaning of section 1206 of the Income Tax Regulations, as amended from time to time, or
(b) in respect of which a reimbursement, compensation or other payment is made, including any amount of assistance or benefit from a government, municipality or other public authority, whether as a grant, subsidy, forgivable loan, deduction from royalty or tax, investment allowance or any other form of assistance or benefit; (frais non admissibles)

operating cost adjustment
operating cost adjustment of an interest holder of a production licence in relation to a project in respect of any month means an amount equal to ten per cent of the allowed operating costs of the interest holder in relation to the project in respect of that month; (rajustement des frais d’exploitation)
point of production
point of production means the point at which transportable petroleum leaves production infrastructure; (point de production)
production facility
production facility[Repealed, SOR/2008-96, s. 3]
production infrastructure

production infrastructure means any equipment and buildings that are used for the production or treatment of petroleum from the reservoir and includes

(a) equipment for natural pressure reduction, mechanical separation, heating, cooling, dehydration and compression, and
(b) batteries, gathering lines, storage areas, tanks, landing areas, heliports and personnel accommodations; (infrastructure de production)

production month
production month means a calendar month in which petroleum is produced from project lands on one or more days in that month; (mois de production)
project
project means a project described in a development plan; (projet)
project commencement date
project commencement date means the date on which a project development plan is approved; (date de démarrage du projet)
project lands
project lands means the frontier lands, described in the production licence or licences issued for the purpose of producing petroleum from those lands in accordance with a project; (terres domaniales du projet)
qualified frontier exploration expenses

qualified frontier exploration expenses means the aggregate of all expenses that are incurred in the drilling or completing of an exploratory well, an exploratory probe or a delineation well that is located on frontier lands in respect of which the Act applies, or in preparing the site in respect of such a well or in the building of a temporary access road to the site, and that

(a) are incurred on or before August 31, 2008,
(b) do not exceed $5 million in respect of any one well,
(c) are not non-qualifying expenses, and
(d) are reasonable in the circumstances; (frais d’exploration admissibles sur des terres domaniales)

return allowance
return allowance of an interest holder of a production licence in relation to a project in respect of any month means the return allowance for that month calculated in accordance with section 9; (allocation de rendement)
transportable petroleum
transportable petroleum means petroleum that is sufficiently free from impurities and is otherwise in such a condition that it will be accepted for transportation by a transportation facility. (hydrocarbures transportables)
transportation facility
transportation facility means a pipeline, tanker or other transportation equipment used to deliver petroleum from project lands, or, in the case described in paragraph 1(1)(m) of Schedule I, from production infrastructure, to the point at which the petroleum is delivered to the first purchaser of the petroleum; (réseau de transport)

(2) Where, in determining the net revenues of an interest holder in relation to a project in respect of the month of payout or any month thereafter, the aggregate of the costs and adjustments, referred to in paragraphs (a) to (d) of the definition “net revenues”, of the interest holder in relation to the project in respect of that month exceeds the gross revenues of the interest holder in relation to the project in respect of that month, the excess shall, for the purposes of these Regulations, be considered to be an allowed capital cost of the interest holder in relation to the project in respect of the following month.
(3) Subject to subsection (4), for the purposes of these Regulations, the provisions of the Income Tax Act, as amended from time to time, apply, with such modifications as the circumstances require, in respect of the determination of whether or not a person is dealing at arm’s length with another person.

(4) For the purpose of the determination referred to in subsection (3),

(a) a partnership or trust shall be considered to be a corporation; and
(b) where a trust is determined to be related to a person, the trustee of the trust shall be considered to be related to that person.

(5) Where a percentage is required to be determined by these Regulations, the percentage shall be calculated to eight decimal points and rounded off to seven decimal points.

SOR/2006-87, s. 1;
SOR/2008-96, s. 3.

Previous Version

Prescribed Royalty

3 (1) The prescribed royalty reserved to Her Majesty under subsection 55(1) of the Act from each interest holder is

(a) in respect of petroleum produced from project lands in a month preceding the month of payout

(i) beginning with the first production month and ending with the eighteenth production month, one per cent of the gross revenues of the interest holder from that petroleum,
(ii) beginning with the nineteenth production month and ending with the thirty-sixth production month, two per cent of the gross revenues of the interest holder from that petroleum,
(iii) beginning with the thirty-seventh production month and ending with the fifty-fourth production month, three per cent of the gross revenues of the interest holder from that petroleum,
(iv) beginning with the fifty-fifth production month and ending with the seventy-second production month, four per cent of the gross revenues of the interest holder from that petroleum, and
(v) beginning with the seventy-third production month and ending with the last production month preceding the month of payout, five per cent of the gross revenues of the interest holder from that petroleum, or

(b) in respect of petroleum produced from project lands in the month of payout or any month thereafter, the greater of

(i) thirty per cent of the net revenues of the interest holder from that petroleum, and
(ii) five per cent of the gross revenues of the interest holder from that petroleum.

(c) [Repealed, SOR/2008-96, s. 4]

(2) Subject to subsection (3), the royalty payable for a month is equal to the amount obtained from the following formula:

A + B - C
where


is the prescribed royalty reserved for the month as calculated under subsection (1);


is the deferred royalty that is payable in the month in accordance with subsection 6.1(2); and


is the amount of royalty deferred in the month in accordance with section 6.

(3) The royalty payable is further reduced by a credit equal to the lesser of the amount calculated under subsection (2) and the investment royalty credit balance.
(4) Royalties are payable on petroleum that is transported from the project lands by a transportation facility or, subject to section 4, consumed, lost or wasted.

SOR/2008-96, s. 4.
Previous Version

Exemption

4 (1) Subject to subsection (2), no royalties are payable in respect of petroleum, produced from project lands, that is

(a) consumed on project lands in drilling or testing or in any production infrastructure for the purposes of the project;
(b) injected into a formation for conservation purposes;

(c) consumed in the operation of a facility, to the extent that

(i) it is for processing or transporting petroleum produced from the project, and
(ii) the cost of the consumed petroleum is not included in a gas processing allowance or a transportation allowance; or

(d) flared.

(2) Subsection (1) does not apply to any petroleum that is wasted within the meaning of subsection 18(2) of the Canada Oil and Gas Operations Act.

SOR/2008-96, s. 5.
Previous Version

Payment of Prescribed Royalty

5 (1) The royalty payable, in respect of a month, is payable in the following two installments:

(a) the first installment is due on the last day of the following month and is equal to the royalty payable under section 3 for the previous month; and
(b) the second installment is due on the last day of the second following month and is equal to the difference between the amount payable under section 3 for the month and the first installment.

(2) If the amount calculated under paragraph (1)(b) is negative,

(a) no second installment is due for that month; and
(b) the amount, as a positive value, is included in the first installment for the following month.

SOR/2008-96, s. 6.
Previous Version

Deferral of Royalty

6 (1) Subject to subsection (2), an interest holder of a production licence in relation to a project may choose to defer an amount of royalty payable for a production month, as determined under subparagraph 3(1)(b)(i), that is equal to 30% of part or all of a contribution that it makes into an abandonment and restoration royalty trust in relation to the project.
(2) The amount of royalty payable deferred in a month shall not reduce the royalty payable with respect to such month below the amount determined under subparagraph 3(1)(b)(ii).
(3) A contribution may be applied, in whole or in part, to defer the amount of royalty payable in the month in which the contribution is made or to the amount of royalty payable in a following month or months.
(4) For the purposes of subsection (1), all realized income earned by the trust shall be considered to be a contribution.

SOR/2008-96, s. 6.
Previous Version

6.1 (1) If an interest holder makes a withdrawal from an abandonment and restoration royalty trust that is greater than the amount by which the trust balance exceeds the contribution deferral balance, the contribution deferral balance for that month is reduced by an amount equal to the result obtained from the following formula:

A - B + C
where


is the amount of the withdrawal;


is the trust balance prior to the withdrawal; and


is the contribution deferral balance prior to the withdrawal.

(2) The amount of deferred royalty payable for that month is equal to 30% of the amount, if any, by which the amount calculated in subsection (1) exceeds the abandonment and restoration expenses which

(a) are allowed capital costs;
(b) are applied against the withdrawal in that month;
(c) have not been used to calculate net revenues or applied against a withdrawal in the previous month; and
(d) include the capital cost adjustment on those expenses.

(3) All realized losses incurred by the trust shall be considered to be a withdrawal.
(4) Any amounts remaining in a trust when the certification of that trust expires under subsection 7(3) shall be treated as a withdrawal.

(5) If an interest holder (in this section referred to as the predecessor) sells an interest or a share of an interest in relation to a project to another person (in this section referred to as the successor), the predecessor may transfer a portion of its contribution deferral balance for that project to the successor, in respect of the same project, equal to the lesser of

(a) the predecessor’s contribution deferral balance for that project multiplied by the percentage interest sold in the project to the successor; and
(b) the amount transferred by the predecessor from its abandonment and restoration royalty trust for that project to the successor’s abandonment and restoration royalty trust for that same project.

(6) The amount determined in subsection (5) will not be considered to be a withdrawal of the predecessor and the contribution deferral balance shall be considered as if it had been made by the successor.

SOR/2008-96, s. 6.

Certification of an Abandonment and Restoration Royalty Trust

7 (1) An interest holder in relation to a project may apply to the Minister, in the prescribed form, for the certification of an abandonment and restoration royalty trust for that interest holder’s interest in the project.

(2) The Minister shall certify the abandonment and restoration royalty trust if

(a) the trust indenture includes the mandatory clauses set out in the prescribed form;
(b) the trust is managed by a trustee that is dealing at arm’s length with the interest holder and that is a corporation resident in Canada that is licensed or otherwise authorized under the laws of Canada or of a province to carry on in Canada the business of offering to the public its services as trustee;
(c) the trust is restricted to holding property described in any of paragraphs (a), (b) and (f) of the definition qualified investment in section 204 of the Income Tax Act;
(d) the trust is established for the sole purpose of holding funds to be used by the interest holder for abandonment and restoration for the project; and
(e) the trust indenture includes a mandatory clause providing that the ownership of the trust cannot be transferred to another person.

(3) An abandonment and restoration royalty trust certification expires on the earlier of the date on which

(a) the interest holder terminates the trust;
(b) the interest holder sells its entire interest in the project;
(c) the interest holder becomes insolvent or commits an act of bankruptcy; or
(d) all abandonment and restoration is completed.

SOR/2008-96, s. 6.
Previous Version

8 (1) If a person (in this section referred to as the successor) acquires, by purchase or otherwise, from an interest holder (in this section referred to as the predecessor) a share in an interest in relation to a project that has not reached the month of payout, the successor’s cumulative costs in relation to that share in respect of the month of acquisition are, subject to subsection (3), an amount equal to the product of

(a) the aggregate of

(i) the amount, if any, by which the predecessor’s cumulative costs in relation to that project in respect of the month immediately preceding the month of acquisition exceed the predecessor’s cumulative gross revenues in relation to that project in respect of the month immediately preceding the month of the acquisition, and
(ii) the predecessor’s return allowance in relation to that project in respect of the month immediately preceding the month of acquisition, and

(b) the ratio that the share of the interest acquired by the successor bears to the share of the interest held by the predecessor immediately before the disposition.

(2) The predecessor’s cumulative costs in a share in an interest in relation to a project in respect of the month of acquisition shall be reduced by the same amount determined for the successor in accordance with subsection (1).
(3) If the amount calculated under subsection (1) or (5) exceeds the cost of the acquisition, the successor’s cumulative costs or allowed capital costs, as the case may be, in a share in an interest in relation to that project in respect of that month are the cost of the acquisition.
(4) If the successor is currently an interest holder of a production licence in relation to a project and either the predecessor or successor has not reached the month of payout for their interest in the project, the cumulative costs, cumulative gross revenues and royalties payable for the acquired interests held by the successor in the project shall continue to be determined separately until all interests held by the successor in relation to the project have reached the month of payout.
(5) If a share of an interest in relation to a project is acquired in a month after the month of payout, and the predecessor has allowed capital costs in that month by virtue of subsection 2(2), a portion of those allowed capital costs shall be allocated to the successor in proportion to the share of the interest being acquired, and the predecessor’s allowed capital costs in that month shall be commensurately reduced.
(6) If a project is comprised of more than one production licence, and the successor’s interest in relation to a project does not include the interests or a share in the interests in all production licences held by the predecessor in relation to the project, the amounts to be allocated to the successor and predecessor, in accordance with subsections (1) to (3) and (5) shall be allocated on a reasonable basis.

SOR/2008-96, s. 6.
Previous Version

Return Allowance

9 (1) A return allowance of an interest holder of a production licence in relation to a project shall be calculated for the month in which the project commencement date falls and for every month after that date, up to but not including the month of payout, if

(a) the interest owner or the representative of the interest owner has notified the Minister of the month in which the interest owner proposes to commence production for the purpose of sale; and
(b) that month is consistent with the development plan.

(2) [Repealed, SOR/2008-96, s. 7]

(3) Subject to subsections (4) and (5), the return allowance of an interest holder in relation to a project in respect of any month for which a calculation is required by subsection (1) shall be equal to the product of
(a) (1.1 + X)1/12 - 1, where X equals the long term government bond rate
and
(b) the amount by which the interest holder’s cumulative costs in relation to the project in respect of that month exceed the interest holder’s cumulative gross revenues in relation to the project in respect of that month.

(4) Subject to subsection (5), where production of petroleum from project lands for the purpose of sale does not begin on or before the proposed month referred to in subsection (1), the return allowance of an interest holder for each month in the period beginning with the month immediately following the proposed month and ending with the month immediately preceding the month in which such production begins shall be equal to the product of

(a) the result obtained by subtracting 1 from the ratio that the inflation index for the month bears to the inflation index for the immediately preceding month, and
(b) the amount by which the interest holder’s cumulative costs in relation to the project in respect of that month exceed the interest holder’s cumulative gross revenues in relation to the project in respect of that month.

(5) For the purpose of calculating the return allowance of an interest holder for a month, each allowed capital cost of the interest holder shall be adjusted as follows:

(a) where the cost was incurred before the project commencement date, it shall be multiplied by the ratio that the inflation index for the month in which the project commencement date falls bears to the inflation index for the month in which the allowed capital cost was incurred; and
(b) where the cost is a qualified frontier exploration expense, it shall be reduced by the amount of any credit that has been deducted under subsection 3(3) to determine the royalty payable in a preceding month if that credit includes an investment royalty credit that is calculated on the basis of that expense.

(6) For the purpose of paragraph (5)(b), if the credit deducted under subsection 3(3) is less than the amount of the investment royalty credit balance in respect of the month in which the royalty is payable, the credit shall be considered to be calculated on the basis of expenses in the order in which they were incurred.

SOR/2006-87, s. 2;
SOR/2008-96, s. 7.

Previous Version

Certification of Qualified Frontier Exploration Expenses

10 (1) An interest holder may make an application to the Minister, in the prescribed form, for the certification of qualified frontier exploration expenses.
(2) The interest holder shall file the application with the Minister not later than one year after the year in which the expenses are incurred.
(3) If the application is filed within the required time period, the Minister shall, if the Minister determines that the expenses are qualified frontier exploration expenses, certify those expenses as qualified frontier exploration expenses.

SOR/2008-96, s. 8.
Previous Version

Reports and Returns

11 (1) Each interest holder of a production licence in relation to a project shall file with the Minister, in the prescribed form,

(a) a pre-project commencement cost statement for that interest in the month of the project commencement in respect of allowed capital costs and allowed operating costs for that interest incurred prior to the month of the project commencement; and
(b) a royalty return for that interest for the month of the project commencement and for every month after that whether a royalty is payable for that month or not.

(2) The interest holder shall file the pre-project commencement cost statement and the royalty return not later than the last day of the second month after the months referred to in paragraphs (1)(a) and (b).

SOR/2008-96, s. 9.
Previous Version

12 (1) Each interest holder of a production licence in relation to a project shall file with the Minister a payout statement, in the prescribed form, in respect of the project for each six month period, beginning with the period that starts with the month in which the project commencement date falls and ending with the period that includes the month of payout.
(2) The payout statement shall be filed not later than the last day of the second month after the six-month period to which it relates.

SOR/2008-96, s. 10.
Previous Version

13 (1) If the interest owner of a production licence in relation to a project consists of only one interest holder, the holder shall file with the Minister and, if the interest owner of a production licence in relation to a project consists of two or more interest holders, the representative of the interest owner shall file with the Minister, in the prescribed form,

(a) a proposed production commencement date statement; and
(b) a production and cost statement for the month in which the project commencement date falls and for every month after that month in respect of the volumes or quantities of petroleum from the project that are produced, consumed or transported from project lands in the month, the project costs for the month and the portion of any petroleum or costs that is attributed to the respective interest holders for the month.

(2) The statement referred to in paragraph (1)(a) shall be filed not later than the 15th day of the month after the month in which the project commencement date falls, and the statement referred to in paragraph (1)(b) shall be filed not later than the 15th day of the second month after the month to which it relates.

SOR/2008-96, s. 11.
Previous Version

14 Each interest holder of a production licence, when paying a royalty, penalty or interest, shall identify, in the prescribed form, the interest holder and the project in respect of which the payment is made.
SOR/2008-96, s. 11.
Previous Version

14.1 (1) Within 60 days after the change in ownership of a share in an interest in relation to a project, the successor and predecessor referred to in section 8 shall file a report with the Registrar that

(a) sets out the changes in ownership of interests in relation to a project;
(b) sets out the amount of cumulative costs for the successor and predecessor in respect of the month of acquisition; and
(c) includes a summary of the terms and conditions of the sales agreement or arrangement.

(2) If the information in the summary referred to in paragraph (1)(c) is insufficient, the Minister may require that a copy of the agreement or arrangement be filed with the Registrar.

SOR/2008-96, s. 11.

15 Each interest holder of a production licence shall retain the information required to be kept under subsection 59(1) of the Act, in respect of royalty returns and statements referred to in subsections 11(1), 12(1) and 13(1), at the interest holder’s place of business in Canada, for a period of six years after the day on which the respective royalty returns and statements are filed.
SOR/2008-96, s. 11.
Previous Version

Interest, Penalties and Refunds

16 (1) For the purposes of section 56 of the Act, the prescribed rate of interest for any period is the rate prescribed by Part XLIII of the Income Tax Regulations, as amended from time to time, in respect of that period.
(2) The interest payable by an interest holder under section 56 of the Act on arrears of royalties, interest or penalties shall be calculated from the day on which the royalties, interest or penalties payable was due to the day on which payment is received by the Minister, and shall be compounded monthly.
(3) If, in the Minister’s opinion, the arrears have occurred through no fault of the interest holder, the interest payable by the interest holder on those arrears shall be calculated from the end of the month after the month in which the arrears were discovered.

SOR/2006-87, s. 3(F);
SOR/2008-96, s. 12.

Previous Version

17 (1) The prescribed penalty to be paid by an interest holder for failing to file a statement or royalty return referred to in sections 11 to 13 or for filing a statement or royalty return that is substantially incomplete or contains information of inadequate quality to properly calculate the royalty payable is $1,000 for each month or part of a month from the day on which the statement or royalty return is due to the day on which the statement or royalty return is filed.
(2) The prescribed penalty to be paid for failing to file a report in accordance with section 14.1 is $1,000 for each month or part of a month from the day on which the report is due to the day on which the report is filed with the Registrar.
(3) Payment of penalties that are prescribed under this section is due on the last day of the month after the month in which they are imposed.

SOR/2006-87, s. 4(E);
SOR/2008-96, s. 12.

Previous Version

18 (1) For the purposes of section 66 of the Act, the circumstances in which the Minister shall refund any overpayment made on account of royalties, interest or penalties are

(a) where, on an assessment, the Minister determines that an overpayment has been made;
(b) where royalties, interest or penalties are remitted in error; or
(c) where such a refund is required to be made by order of a court.

(2) The Minister shall not refund any overpayment on the amounts specified in subsection 5(2) except for the last production month.

SOR/2008-96, s. 13.
Previous Version

19 (1) For the purposes of section 66 of the Act, the prescribed rate of interest for any period is the rate referred to in subsection 16(1).
(2) The interest payable by the Minister under section 66 of the Act on an overpayment made by an interest holder on account of royalties, interest or penalties shall be calculated from the end of the second month after the month in which the overpayment was made and shall be compounded monthly.

SOR/2008-96, s. 14.
Previous Version

20 If interest or penalties are payable by the interest holder, any payments received shall be applied first to penalties payable, second to interest payable and third to royalties payable.
SOR/2008-96, s. 15.

21 (1) Interest is payable on deferred royalties that are payable under subsection 6.1(2) and is calculated from the date that the deferral is made.
(2) For the purpose of calculating the interest, withdrawals from an abandonment and restoration royalty trust are applied to deferred royalties in the order in which they are deferred.

SOR/2008-96, s. 15.

SCHEDULE I(Subsection 2(1) and Schedule II)Allowed Project Costs

1 (1) Subject to sections 2 to 5, allowed capital costs of a project are costs or expenses that are reasonably related to the project and that are

(a) incurred in drilling or completing a discovery well, a delineation well or a development well located on the project lands;
(b) incurred in building an access road to or preparing a site in respect of a discovery well, a delineation well or a development well, where the well is located on the project lands;
(c) incurred, after the drilling of a discovery well, in respect of the collection in the field of basic geological, geophysical and geochemical information for the purpose of delineating the significant discovery indicated by the discovery well located on the project lands;
(d) a geological, geophysical or geochemical expense incurred in respect of logging, coring or testing conducted in the course of the drilling of a well referred to in paragraph (a);

(e) incurred in drilling or converting a well for

(i) the disposal of waste liquids from a well located on the project lands,
(ii) the injection of water, gas or any other substance into a petroleum formation to assist in the recovery of petroleum from another well located on the project lands, or
(iii) the purposes of monitoring fluid levels, pressure changes or other phenomena in an accumulation of petroleum located on the project lands;

(f) incurred in drilling for water or gas on the project lands for injection into a petroleum formation located on the project lands;
(g) incurred in drilling or recompleting a petroleum well located on the project lands after the commencement of production from the well;
(h) incurred in respect of abandonment and restoration;
(i) incurred in acquiring or constructing production infrastructure that is to be located on the project lands or installing production infrastructure on the project lands;
(j) incurred in order to licence or purchase technology for the project, including any royalty or other cost paid in respect of letters patent;
(k) incurred to repair or maintain production infrastructure that is located on the project lands when the cost of those repairs or that maintenance is equal to or greater than 50% of the cost of equivalent new production infrastructure;
(l) incurred in conducting a study of some aspect of the project that is required by or under law before the project or the relevant part of the project is allowed to proceed; or
(m) expressly incurred as a cost under paragraph (i) or (k) but, for economic, environmental or logistical reasons, is for production infrastructure that is not located on project lands.

(2) Subject to sections 2 to 5, allowed operating costs of a project are costs or expenses, other than allowed capital costs, that are reasonably related to the project and that are

(a) incurred on account of the salary, wages or other remuneration or related benefits of persons employed by the operator of production infrastructure that is located on the project lands;

(b) incurred

(i) in respect of the repair or maintenance of production infrastructure that is located on the project lands, when the cost of those repairs or that maintenance is less than 50% of the cost of equivalent new production infrastructure,
(ii) on account of taxes in respect of production infrastructure that is located on the project lands, or
(iii) on account of the rental or leasing of production infrastructure that is located on the project lands;

(c) incurred on account of premiums payable in respect of a policy of insurance, other than a policy of insurance for loss of revenue;

(d) incurred on account of

(i) the use of or the right to use any property located on the project lands,
(ii) compensation for a service performed on the project lands,
(iii) the acquisition of materials, parts or supplies for use on the project lands, or
(iv) the transportation of supplies or personnel to or from the project lands;

(e) incurred on account of telecommunications, power, water or fuel used on the project lands;
(f) incurred on account of the disposal of waste materials, including sewage, from the project lands; or
(g) incurred on account of any production infrastructure whose cost is an allowed capital cost under paragraph (1)(m) that otherwise would be an allowed operating cost under paragraphs (a) to (f) if incurred in respect of production infrastructure that is located on project lands.

2 Subject to section 4, the following are not allowed capital costs or allowed operating costs of a project:

(a) the part of a cost that is subject to reimbursement, compensation or other payment, including any amount of assistance or benefit from a government, municipality or other public authority, whether as a grant, subsidy, forgivable loan, deduction from royalty or tax, investment allowance or any other form of assistance or benefit where, at the time the cost is incurred, the interest holder who incurs the cost has received or has an absolute right to receive that payment;
(b) an amount on account of interest, including an amount or expense described in paragraph 20(1)(c), (d) or (e) of the Income Tax Act, as amended from time to time;
(c) a payment to a person who does not deal at arm’s length with the interest holder making the payment, to the extent that the payment exceeds the fair market value of the property, the use of the property, the right to use the property or the performance of a service in respect of which the payment is made;
(d) a cost or expense in respect of the administration, management, overhead or financing of an interest holder or of the operator of production infrastructure;
(e) a payment on account of an overriding royalty, a net profits interest, a carried interest or other similar interest;
(f) a cost or expense resulting from any act or omission that constitutes a breach of any federal, provincial or municipal law;
(g) a cost or expense in respect of processing petroleum, other than a cost or expense in respect of producing transportable petroleum;
(h) a cost or expense in respect of the transportation of petroleum produced from the project lands to a point beyond the boundary of the project lands, unless it is for production infrastructure that is not located on project lands in accordance with paragraph 1(1)(m);
(i) an allowed capital cost or allowed operating cost, respectively, of another project, unless it was allocated in accordance with section 3;
(j) a tax imposed under Part IX of the Excise Tax Act, as amended from time to time;
(k) the administrative costs of an abandonment and restoration royalty trust; or
(l) a cost or expense that is not expressly provided for in section 1.

3 If allowed capital costs or allowed operating costs are attributable to more than one project or use, those costs shall be allocated to each project on a reasonable basis.
4 For the purposes of paragraph 2(a), if a person has transferred or assigned a right referred to in that paragraph, that person is considered to have received the amount of the reimbursement, compensation or other payment at the time of the transfer or assignment.

5 (1) Subject to subsection (2), if in any month there is an entitlement to receive an amount under a policy of insurance for loss or damage to property, or an amount from the licensing or from the sale, lease or other disposition or use of any tangible or intangible asset,

(a) the allowed capital costs in respect of that month shall be reduced by the amount of that entitlement, or by the fair market value of that property or asset, whichever is greater, when the cost of the property or asset to which the entitlement relates is an allowed capital cost of the project; and
(b) the allowed operating costs in respect of that month shall be reduced by the amount of that entitlement, when the cost of the property or asset to which the entitlement relates is an allowed operating cost of the project but not an allowed capital cost of it.

(2) If the amount by which the allowed capital costs or the allowed operating costs are reduced under paragraph (1)(a) or (b), as the case may be, exceeds the amount of those costs in that month, the difference shall be considered to be the allowed capital costs or allowed operating costs, as the case may be, expressed as a negative value.

SOR/2008-96, ss. 16 to 18, 19(E), 20.
Previous Version

SCHEDULE II(Subsection 2(1))Determination of Revenues and Allowances

Interpretation

1 The following definitions apply in this Schedule.

average capital
average capital, in respect of a month, means the sum of the average net capital, the land value and the working capital allowance for the month. (capital moyen)
average net capital
average net capital, in respect of a month, means the sum of the opening net capital and closing net capital for the month divided by two. (capital net moyen)
closing net capital
closing net capital, in respect of a month, means the book value, before depreciation, at the end of the month, of all depreciable assets forming part of or permanently used at a facility at the beginning of the month plus 101% of the book value, before depreciation, of all depreciable assets acquired during the month and forming part of or permanently used at the facility at the end of the month, less all depreciation allowances in respect of those assets for that month and the preceding months. (capital net de fermeture)
depreciable assets
depreciable assets means property in respect of which capital cost allowances may be deducted under the Income Tax Act, as amended from time to time. (bien amortissable)
facility operating costs
facility operating costs, in respect of a month, means the facility operating costs that are described in and calculated in accordance with section 7 and that are incurred in that month. (frais d’exploitation d’une installation)
land value
land value means the acquisition cost of land on which a facility is permanently located. (valeur foncière)
opening net capital
opening net capital, in respect of a month, means the book value, before depreciation, at the beginning of the month, of all depreciable assets forming part of or permanently used at a facility at the beginning of the month, less all depreciation allowances in respect of those assets for the preceding months. (capital net d’ouverture)
return on average capital
return on average capital, in respect of a month, means an amount equal to the average capital for the month, multiplied by that percentage equal to 5% plus the long-term government bond rate, and divided by 12. (rendement du capital moyen)
working capital allowance
working capital allowance, in respect of a month, means an amount equal to 110% of the facility operating costs for that month multiplied by two. (déduction pour fonds de roulement)

Determination of Gross Revenues

2 (1) The revenues of an interest holder from petroleum produced from project lands are

(a) if the petroleum is sold by the interest holder to a purchaser with whom the interest holder is dealing at arm’s length and there is no arrangement of hedging or other similar arrangement, the aggregate of

(i) the amount of money and other consideration payable to the interest holder for the petroleum,
(ii) all amounts payable to or on behalf of the interest holder by the purchaser in respect of costs or expenses that by industry custom are normally paid by the interest holder, and
(iii) in the case of a sale under a take or pay agreement, the amount, if any, by which the fair market value of the petroleum for the production month for which the prescribed royalty is payable exceeds the aggregate of the amounts described in subparagraphs (i) and (ii);

(b) if the petroleum is sold by the interest holder to a purchaser with whom the interest holder is dealing at arm’s length and there is an arrangement of hedging or other similar arrangement, the fair market value of the petroleum for the production month for which the prescribed royalty is payable;

(c) if the petroleum is sold by the interest holder to a purchaser with whom the interest holder is not dealing at arm’s length, the greater of

(i) the fair market value of the petroleum for the production month for which the prescribed royalty is payable, and
(ii) the amount of money and other consideration payable to the interest holder for the petroleum;

(d) if the petroleum is lost and that loss is insured under a policy of insurance, the greater of

(i) the insurance proceeds payable to the interest holder under the policy, and
(ii) the fair market value of the petroleum for the production month for which the prescribed royalty is payable; and

(e) in any case not described in paragraphs (a) to (d), the fair market value of the petroleum for the production month for which the prescribed royalty is payable.

(2) The gross revenues of an interest holder from petroleum produced from project lands are equal to the revenues calculated under subsection (1), less the sum, not exceeding 95% of those revenues, of any allowances for that petroleum as determined in accordance with sections 4 and 5.
(3) For the purpose of calculating the gross revenues or fair market value referred to in this section, the petroleum produced from project lands shall be valued at the point of production.
(4) Where, in determining the gross revenues of an interest holder in relation to a project in respect of a month, the aggregate of the gas processing allowance and the transportation allowance exceeds the revenues calculated under subsection (1), the portion of the excess that is attributable to an operational disruption at a facility for the purposes of maintenance shall be considered to be the gas processing allowance and the transportation allowance of the interest holder in relation to that project in respect of the following month.

3 For the purposes of section 2, the fair market value of petroleum shall not include hedging or other similar arrangements and shall be determined by reference to

(a) the published posted prices, market prices and index prices for sales of petroleum in that production month;
(b) the revenues received by interest holders in respect of petroleum produced from project lands in that month and sold to purchasers with whom the interest holders are dealing at arm’s length; and
(c) any other factors that may be reasonable in the circumstances.

3.1 For the purposes of sections 2 and 3, an arrangement of hedging or a similar arrangement does not include the first two years of a forward sale of petroleum if the contract for that sale

(a) provides for the physical delivery of the petroleum; and
(b) was based on market prices at the time it was entered into.

Gas Processing Allowance

4 The gas processing allowance of an interest holder in respect of gas processed at a gas plant is

(a) where the plant is wholly owned by a person or persons with whom the interest holder deals at arm’s length, the amount payable by the interest holder to the owner or owners of the gas plant for that processing; and
(b) where the plant is owned in whole or in part by the interest holder or by a person with whom the interest holder does not deal at arm’s length, that portion of the facility allowance determined in accordance with section 6 for the gas plant that is reasonably related to that processing.

Transportation Allowance

5 (1) Subject to subsection (2), the transportation allowance of an interest holder for petroleum delivered through a transportation facility to a purchaser at a point beyond the boundary of the project lands is

(a) where the facility is wholly owned by a person or persons with whom the interest holder deals at arm’s length, the amount payable by the interest holder to the owner or owners of the facility for transporting the petroleum; and
(b) where the facility is owned in whole or in part by the interest holder or by a person with whom the interest holder does not deal at arm’s length, that portion of the facility allowance determined in accordance with section 6 for that transportation facility that is reasonably related to the transportation of the petroleum.

(2) The transportation allowance of an interest holder for petroleum delivered to a purchaser at a point beyond the boundary of the project lands through a transportation facility, the tolls and tariffs of which are regulated pursuant to the laws of Canada or of a province, is the amount payable by the interest holder for that transportation in accordance with the approved tolls and tariffs for the facility in force at the time the petroleum is transported.

Facility Allowance

6 (1) Subject to subsection (2), the facility allowance for any month shall be equal to the result obtained from the following formula:

A + B + C - D
where


is 110% of the facility operating costs as described in section 7 for the month;


is the depreciation allowance for the facility for the month;


is the return on average capital for the month; and


is any amounts payable in that month for use of that facility by persons dealing at arm’s length with that facility.

(2) For the purpose of calculating the depreciation allowance referred to in element B of the formula set out in subsection (1), all depreciable assets forming part of or permanently used at the facility shall be depreciated on a straight line basis over the facility’s remaining useful life.

6.1 (1) The interest holder’s facility allowance shall be adjusted in accordance with subsection (2) when a facility that is owned in whole or in part by an interest holder or by a person with whom the interest holder does not deal at arm’s length is sold to a person or persons with whom the interest holder deals at arm’s length and who are not interest holders in any other project served by the facility.

(2) The interest holder’s facility allowance shall be adjusted in the month of the sale by deducting the lesser of the amount, at the time of the sale,

(a) by which the closing net capital for the facility is exceeded by the proceeds from the sale of the facility; and
(b) of the total cumulative depreciation, calculated in accordance with subsection 6(2), of all depreciable assets forming part of or permanently used at the facility.

(3) If the facility allowance is negative after the adjustment, the absolute amount of the negative facility allowance shall be added to the gross revenues in that month.
(4) When a facility that is owned in whole or in part by an interest holder or by a person with whom the interest holder does not deal at arm’s length is sold to another interest holder in the project or to a person with whom the interest holder does not deal at arm’s length, the opening net capital of the purchaser’s interest in the facility shall be the amount determined by multiplying the sellers’s closing net capital by the percentage of the facility that is sold.

7 (1) Subject to subsections (2) and (3), facility operating costs are costs or expenses, other than costs or expenses relating to depreciable assets, that are reasonably related to the operation of the facility and that are

(a) incurred on account of the salary, wages or other remuneration or related benefits of persons employed by the operator of the facility;

(b) incurred

(i) in respect of the repair or maintenance of the facility, where the cost of the repair or maintenance is less than fifty per cent of the cost of an equivalent new facility,
(ii) on account of taxes in respect of the facility, or
(iii) on account of the rental or leasing of the facility;

(c) incurred on account of premiums paid in respect of a policy of insurance other than insurance for loss of revenue;

(d) incurred on account of

(i) the use of or the right to use any property,
(ii) compensation for the performance of a service, or
(iii) the acquisition of material, parts or supplies;

(e) incurred on account of telecommunications, power, water or fuel; or
(f) incurred on account of the disposal of sewage.

(2) Subject to subsection (4), the following are not facility operating costs:

(a) the part of a cost subject to reimbursement, compensation or other payment, including any amount of assistance or benefit from a government, municipality or other public authority, whether as a grant, subsidy, forgivable loan, deduction from royalty or tax, investment allowance or any other form of assistance or benefit where, at the time the cost is incurred, the interest holder who incurs the cost has received or has an absolute right to receive the payment;
(b) an amount on account of interest, including an amount or expense described in paragraph 20(1)(c), (d) or (e) of the Income Tax Act, as amended from time to time;
(c) a payment to a person who does not deal at arm’s length with the interest holder making the payment to the extent the payment exceeds the fair market value of the property, the use of the property, the right to use the property or the performance of a service in respect of which the payment is made;
(d) a cost or expense in respect of the administration, management, overhead or financing of an interest holder or of the operator of the facility;
(e) a cost or expense resulting from any act or omission that constitutes a breach of any federal, provincial or municipal law;
(f) a facility operating cost of another facility;
(g) a cost or expense that is an allowed capital cost or an allowed operating cost of a project under Schedule I;
(h) a cost or expense in respect of the transportation of petroleum produced from the project lands to a point within the boundary of the project lands;
(i) a tax imposed under Part IX of the Excise Tax Act, as amended from time to time; or
(j) a cost or expense not expressly provided for in subsection (1).

(3) Facility operating costs that are attributable to more than one facility shall be allocated to each facility on a reasonable basis.
(4) For the purposes of paragraph (2)(a), where a person has transferred or assigned a right referred to in that paragraph, the person is considered to have received the amount of the reimbursement, compensation or other payment at the time of transfer or assignment.

SOR/2008-96, ss. 21 to 26.
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