Taxation of Mining and Petroleum

The following article discusses various types of business arrangements, such as farmouts, participation agreements, operating agreements, joint ventures, etc., which are frequently used in the natural resources extraction industry. The article then discusses section 66 of the Income Tax Act, and in particular, through a review of case law, legal writings and legislative enactments, the author defines and suggests the proper interpretation of the words "association", "partnership" and "syndicate" which, although used in the Act, are not defined. The author then outlines five significant tax provisions which result from the new partnership tax proposals in the Income Tax Act, and which must be of concern to every business which is involved in the area of natural resource extraction. How to determine whether or not a certain business relationship is a partnership, and the consequent applicability or non-applicability of the new partnership taxing provisions, is outlined and examined. The author suggests, however, that in all likelihood the new partnership taxation provisions would only be applied to the clear-cut cases of partnerships and would not be applied to the various types of business arrangements referred to above. In his concluding comments, the author discusses certain election provisions in the Internal Revenue Code of the United States; encourages the government to specifically exclude the normal extractive industry relationships from taxation as partnerships; and discusses the effect of the new tax provisions in relation to the problem of obtaining American capital.