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

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  • (c) [Repealed, SOR/2008-96, s. 4]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

  A

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

  B

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

  C

  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.

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.

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.

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.

• 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

  A

  is the amount of the withdrawal;

  B

  is the trust balance prior to the withdrawal; and

  C

  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.

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.

• 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.

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.

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.

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).