If there isn’t an oil well on the back 40, mineral rights may be something you never even think about, but maybe you should.
“Often the family is not even aware of their existence until they are discovered during a routine title search in the administration of a deceased family member’s estate,” says Humboldt, Sask., lawyer Amber Biemans.
I strongly urge people to check into the holdings of their elderly relatives and parents such that estate planning can be undertaken to avoid unnecessary probate fees,” she says.
Managing mineral rights
Income from minerals is called royalties and treated as investment income. Like income from property, it is taxed on the full amount of income as opposed to capital gains, which are taxed on only half of the amount of income.
There are advantages and disadvantages in transferring freehold mineral interest to a corporation rather than to individual beneficiaries.
Corporations: advantages and disadvantages
“In my dealings with mineral rights the vast majority of purchasers put the titles into their personal names,” says Biemans. “I do qualify this generalization with the fact that most mineral titles that I have dealt with have been for non-producing minerals, and as such do not have a significant value nor do they generate income.”
If the mineral rights were for a valuable or producing mineral, then the holder would be more likely to purchase the same within a corporation due to the preferential taxation treatment that corporations receive, as well as other benefits that corporations have.
Trusts and mineral titles
A structure often used when mineral titles are held by a corporation is for the shareholder of the corporation to be a trust rather than individuals, and for the trust to have various individuals as beneficiaries, says Biemans. The trust structure offers several benefits:
- Third parties or the lessee of the mineral rights need only negotiate and sign contracts with one or a few trustees as opposed to a large group of beneficiaries. This can be valuable in instances where beneficiaries have differing interests and objectives, have contentious relationships or live in various countries.
- The trustees can manage the trust income, and in some trusts may be permitted to vary the royalties (income) paid to each beneficiary.
- The beneficiaries of the trust can be easily changed without needing to amend documents such as mineral leases.
There are also other benefits to having mineral titles held by a corporation, says Biemans:
- There can be more individual owners with an interest in the mineral rights because a mineral title cannot be divided into portions less than 1/18, whereas a corporation can have much more than 18 shareholders.
- The income earned from the mineral rights is taxed at a lower rate within a corporation than the individual rate, and the income can subsequently be held within the corporation and paid out to shareholders over time as opposed to all paid out and taxed within the year that it is received.
- A unanimous shareholders agreement could be used to deal with the distribution of income, management of the corporation and restrictions on to whom shares can be transferred. Such restrictions in ownership are useful in limiting the shareholders to a certain group of people, such as one’s children while preventing the spouses of those children from becoming owners of shares in the event of the divorce/separation, bankruptcy, or death of the child.
Disadvantages to holding mineral titles in a corporation
Unlike individuals, corporations are charged mineral taxes at a rate of about $1.50 per acre.
There is an exception to this taxation in that farm corporations can apply every three years for an exemption from these taxes. Once the mineral title is in a corporate name, the taxable status cannot be changed unless the mineral title is sold to a third party that is unrelated to the shareholders of the corporation.
This is detrimental in cases where the corporation is no longer actively farming and does not want to begin to pay mineral taxes, or when the shareholders want the corporation to divest itself of the mineral rights and transfer the same outside of the corporation to the shareholders. In that instance, the shares remain taxable for mineral rights despite their ownership becoming individual.
Also, mineral rights are considered property and without a pre-nuptial agreement stating otherwise, they would be included in divisible property in the event of a divorce, says Biemans.
If they were owned by one of the parties before the marriage, they might be exempted but the increase in their value from the commencement of the spousal relationship would still be considered shareable.
If you don’t know, find out if there are mineral rights attached to any of your properties. Talk to your lawyer and accountant.
What is under the ground might be as important as the ground itself when settling an estate following a death