20 December 1995 External T.I. 9526825 - ENTRY FEE PAYMENTS & WITHHOLDING TAX

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether surface lease payments are on account of capital or income and whether they are subject to withholding tax if paid to a non-resident.

Position:

Question of fact as to whether they are on account of capital or income. Subject to withholding under 212(1)(d) of the Act if on account of income and subparagraph 115(1)(b)(i) and subsections 116(2) and 116(5) apply if on account of capital.

Reasons:

Amounts paid on account of income would be "rent, royalty or similar payment" within the meaning of paragraph 212(1)(d) of the Act. Amounts paid in respect of the disposition of land would be dispositions of taxable Canadian property pursuant to subparagraph 115(1)(b)(i) of the Act and the rules in section 116 of the Act would apply.

		952682
XXXXXXXXXX	A. Seidel
(613) 957-8974

Attention: XXXXXXXXXX

December 20, 1995

Dear Sirs:

This is in reply to your letter dated September 27, 1995, in which you requested our views as to whether certain payments by persons exploring and drilling for oil and gas to obtain surface leases from the owner of the land they wish to enter are on account of capital or income; and whether these payments would be subject to withholding tax if they are paid to a non-resident. You have specifically requested our views with respect to annual rental payments, the first lump sum payment made to a landowner and the right of entry fee paid to the landowner pursuant to subsection 19(1) of the ^{Surface Rights Act} of Alberta (the "ASRA").

It appears that the interpretation you seek relates to specific transactions and taxpayers and, therefore, we bring to your attention Information Circular 70-6R2 ("IC 70-6R2") dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted as outlined in IC 70-6R2. Nevertheless, we offer the following general comments in response to your letter.

Whether or not any portion of the payments made to a landowner in respect of a surface lease is on account of income or capital is a question of fact that can only be determined after reviewing all of the facts in a particular situation. The Department's views with respect to payments received from surface rentals and the right to receive compensation for property because of statute law are discussed in Interpretation Bulletin IT-200 ("IT-200") and Interpretation Bulletin IT-182 ("IT-182"), respectively.

As discussed in paragraph 1 of IT-200, to the extent that the surface lease requires annual rental payments, such payments would be expensed in the year they are paid or become payable. It is our view that the annual rental payments would constitute "rent, royalty or similar payments", within the meaning thereof in paragraph 212(1)(d) of the Income Tax Act (the "Act"), such that they would be subject to withholding tax pursuant to subsection 212(1) of the Act when they are paid to a non-resident person.

In the situation where there is a lump sum payment in the first year and the payment is for such things as damage to land or land improvements, inconvenience, severance and the first year's annual rent, the portion of the lump sum that is equal to the annual rental payment would be expensed (refer to paragraph 1 of IT-200) and, when paid to a non-resident person, would also be subject to withholding tax as discussed in the preceding paragraph.

As described in paragraph 2 of IT-200, the capital portion of the first year's lump sum payment which is received as compensation for land (which is held as capital property) injuriously affected, damaged or destroyed would be considered to be "proceeds of disposition", within the meaning thereof in section 54 of the Act, and would result in a capital gain or loss to the landowner. Where such property is situated in Canada and is disposed of by a non-resident of Canada to a resident in exchange for a lump sum payment by the resident to the non-resident, it is our view that this capital portion of the lump sum payment would be received by the non-resident landowner from the disposition of property that constitutes "taxable Canadian property" by virtue of subparagraph 115(1)(b)(i) of the Act. If the non-resident does not comply with the requirements of subsections 116(2) and 116(4) of the Act, the purchaser may become liable to pay a specified amount of tax under subsection 116(5) of the Act on behalf of the non-resident. The circumstances under which the purchaser will become liable for tax and the amount of tax that the purchaser will be liable for are discussed in paragraphs 43 and 44 of Information Circular 72-17R4. The amount of withholding tax provided for therein would be withheld from the proceeds paid to the non-resident person and would be remitted to the Receiver General.

Subsection 19(1) of the ASRA states that "an operator who proposes to exercise a right of entry on land, other than land owned by the Crown, shall pay ... an entry fee ... calculated in respect of each titled unit of the respondent that contains land that is granted to the operator" and subsection 19(4) of the ASRA provides that the entry fee is payable in addition to any compensation payable under subsection 20(1) of the ASRA. The entry fee described in subsection 19(1) of the ASRA is a one time payment required to be made before the operator enters the landowner's property. As stated in paragraph 4 of IT-182, in the situation where a taxpayer has a right to compensation for a property because of statute law, the compensation that is in respect of the loss or destruction of capital property is considered to be proceeds from disposition of the property. It is our view that the entry fee paid to the landowner pursuant to subsection 19(1) of the ASRA would represent compensation for capital property, being the land, if such land is held on account of capital, which would be considered to be proceeds of disposition. As discussed above, where the payment is made to a non-resident, the provisions of subparagraph 115(1)(b)(i) and subsections 116(2) and 116(5) of the Act would apply.

These comments are provided in accordance with the guidelines set out in paragraph 21 of IC 70-6R2.

Yours truly,

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch