Production Payments

  • Neil J. Stewart


Because of the uncertainties and risks associated with natural resource production, special incentives for such production may be provided in taxation law. In Canada and the United States special Income Tax provisions allow for the use of the Production Payment - the sale in advance to a right of production - as such a tax incentive. The writer deals with two types of Production Payment, the Retained payment, and the Carved-Out payment. He sets out the essential features of both and outlines the position of the Tax Courts regarding each. The differences between such payments and normal royalties, and the position of Depletion are discussed. It is concluded that carefully planned production payments remain a useful device for natural resource industry financing.