Words and Phrases - "exploit"
Notice 269 – Draft GST/HST Memorandum 3.7, "Natural Resources" 15 February 2012
Overview of section 162
1. Section 162 deems the following supplies of natural resource property rights not to be supplies for GST/HST purposes:
- a right to explore for or exploit a mineral deposit, a peat bog or deposit of peat or a forestry, water or fishery resource,
- a right of entry or user relating to such rights,
- any right to a royalty or profit interest in relation to the resource, or
- a right to enter or use land to generate or evaluate the feasibility of generating electricity from sun or wind.
Meaning of mineral ss 123(1)
3. "Mineral" includes... substances that are considered to be minerals within the ordinary meaning of that word. Although not specifically mentioned, rock and riprap are also included.
Meaning of explore and exploit
7. The Act does not define "explore" or "exploit" with respect to natural resources. The common meaning of explore is to search and discover, or to make or conduct a systematic search. The common meaning of exploit is to make productive use of or to utilize. Exploration and exploitation generally include activities up to, and at, the "central point", provided the central point for gas processing is located in, or adjacent to, the field. The "central point" is understood in the oil industry to mean the first storage battery after oil treatment for crude oil, and in the gas industry, to mean the facility at which natural gas is collected, cleaned and processed into saleable product for delivery to market.
Meaning of "to explore for natural resources"
8. "To explore for natural resources" refers to the search for a mineral deposit by geological surveys, geophysical prospecting, drilling boreholes and making trial pits, or surface or underground digging or tunneling.
Meaning of "to exploit a natural resource"
9. "To exploit a natural resource" means:
- for petroleum products, the extraction of the products from the earth and processing up to, and including, processing done at the battery for transformation into transportable crude oil, and including transportation to the battery;
- for natural gas, the extraction of the product from the earth and all processing up to, and including, the removal of natural gas liquids at a gas plant, and including transportation to the plant where the natural gas liquids are removed;
- for mining products, the excavation of the minerals from the earth and any processing not beyond, but including, the prime metal stage or its equivalent;
- for sand and gravel, the excavation of the product from the earth and all processing done to crush and filter the sand and gravel;
- for peat bogs or deposits, the extraction of the peat from the bog or the deposit;
- for forestry resources, the harvesting of trees;
- for water resources, the right to use or remove water; and
- for fishery resources, the removal of the resources at the site.
10. Exploitation does not include any additional processing of crude oil (e.g., refining) and any processing of gas downstream from a gas plant. It also does not include transportation to market or downstream to a central point. However, it does generally include transportation up to the central point.
11. Exploitation generally does not include storage rights (e.g., the storage of natural gas in anticipation of improved market conditions or the storage of natural gas in underground storage facilities). Certain storage rights may be considered a right of entry or user within the meaning of paragraph 162(2)(b) (e.g., storage facilities located in, or immediately adjacent to, an oil or gas field that are for the purposes of storing production from the field before the transfer to transportation or transmission facilities).
Freehold v. royalty
19. Subject to the exceptions set out in subsection 162(3), a supply of a right to explore for or exploit a mineral deposit, if supplied by itself, is deemed not to be a supply pursuant to subsection 162(2). Where the right to explore for or exploit a mineral deposit is only one component of a supply of a bundle of rights, subsection 162(2) does not apply because subsection 162(2) applies only to supplies of those rights that are specifically listed therein. Therefore, subsection 162(2) does not apply to a sale of a freehold mineral title or a sale of land that includes the underlying minerals.
Single or multiple supplies
... 24. Whether a single supply of a surface lease is within the scope of subsection 162(2) depends on the purposes and uses for which the land was leased. For example, if a lessee is using the land to complete a geophysical survey, to drill a well, or to extract oil or gas, then this single supply is a supply described in subsection 162(2) ... .
Royalty interest
25. In order to spread the risk when exploring for or exploiting a mineral deposit, a number of persons may have an interest in the property. The interest usually takes one of two forms – a royalty interest or a working interest. A royalty interest entitles the holder of the interest to a fee based on the units or value of production. A royalty interest can take a variety of forms including a gross overriding royalty. A gross overriding royalty is an interest in the revenue from the sale of a product (e.g., oil, gas, iron, or gold) produced at a specific property. It is usually expressed as a percentage of the gross revenue from the property before any expenses and claims by the working interest owner(s) are deducted ("working interest" is defined in paragraph 26 below). Subsection 162(2) deems the supply of such a right not to be a supply ... .