Structuring Oil And Gas Venturesbasic Tax Considerations
Authors: Parsons Robert B. 
Published: March 2010

Abstract
Canadian income tax legislation contains a number of provisions which are intended to facilitate the structuring of oil and gas ventures, in recognition of the high risk and capital requirements of such ventures. These rules, many of which are unique to the resource industries, are often complex and not easily understood. This article attempts to cut through that complexity, and to explain in plain English the main income tax implications of the various different ways of structuring such ventures in Canada.

Introduction
Canada's petroleum industry (along with its mining industry) is probably singled out for more special attention under this country's tax legislation than any other industry. Such special treatment is not always welcomed by the resource industries witness, for example, the various proposed policies of the National Energy Program which threaten the viability of many resource ventures. On the other hand, certain provisions of the income tax legislation treat the industry in a relatively favourable manner, including a number of rules which, in recognition of the high risk and capital requirements of the resource sector, serve to facilitate the structuring of resource ventures. Many of these particular provisions are unique to the petroleum and mining industries.
This article examines briefly the fundamental Canadian income tax considerations of structuring resource ventures in Canada, from the basic structures to more complicated ones. Because the actual income tax rules and regulations which apply to the different scenarios mentioned below are highly complex, and in view of the limited scope of this article, it is important that the income tax legislation be consulted in the course of implementing and operating any of the structures which are described herein.
In addition, it is recognized that other important legislation for example, the Petroleum Incentives Program must be taken into account in any consideration of these structures.
The first part of the article deals with investments in an oil and gas venture by way of share capital. The article goes on to review direct ownership of oil and gas properties and other assets, and then finally takes a brief look at the partnership form of investing in petroleum exploration and development and production ventures. As is seen below, the income tax implications for the various taxpayers who are involved in these different kinds of ventures can vary significantly, depending on the actual terms and legal characteristics of the structure.

Equity investment
The several means of structuring a resource venture through the issuance and ownership of share capital include the following:conventional equity financing;flow-through" shares;joint exploration corporations; and"roll-over" reorganizations.
Of course, variations and combinations of these and other structures are possible, but the following discussion restricts itself to the principal income tax considerations of these four basic structures.

Conventional equity financing
Generally speaking, in the case of ordinary share financing of a corporation which undertakes an oil and gas venture, the shareholder will realize his income by way of dividends received in respect of his shareholding and/or through realizing a gain on the sale of his shares.