Frontier Lands Petroleum Royalty Regulations (SOR/92-26)

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

    A

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

    B

    is the depreciation allowance for the facility for the month;

    C

    is the return on average capital for the month; and

    D

    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.