Oil Sands Properties
The Budget proposes that the cost of oil sands leases and other oil sands resource property be treated as a Canadian oil and gas property expense (“COGPE”) deductible at a rate of 10% per year, instead of its current treatment as a Canadian development expense (“CDE”) deductible at a rate of 30% per year (both on a declining balance basis). This change will align the oil sands sector with the conventional oil and gas sector, and will be effective for acquisitions made on or after Budget Day.
Proceeds from the disposition on or after Budget Day of a taxpayer’s oil sands resource property will be applied to reduce the taxpayer’s cumulative CDE, or cumulative COGPE, based on the treatment by the taxpayer when the particular property was acquired. These changes will also apply to oil shale property, which is treated in a manner similar to oil sands resource property.
Pre-Production Development Expenses of Oil Sands Mines
The Budget proposes that development expenses incurred for the purpose of bringing a new oil sands or oil shale mine into production in reasonable commercial quantities be treated as CDE, deductible at a rate of 30% per year instead of its current treatment as a Canadian exploration expense (CEE), which is fully deductible in the year incurred. This will align the deduction rates for pre-production development costs in oil sands or oil shale mines with the rates applicable to in situ oil sands projects and the conventional oil and gas sector.
The Budget provides certain transitional relief for pre-production mining projects in recognition of the long time frames involved in developing oil sands and oil shale mining projects. The current CEE treatment will be maintained for expenses incurred before Budget Day, and for expenses incurred before 2015 for new mines on which major construction began (under prescribed rules) before Budget Day. Otherwise, the CDE treatment will be phased in on a gradual basis.