29 August 2013 Interpretation 143128

The Optionor "options" mineral resource Tenures to an Optionee who is granted the right to explore the Tenures, and is required to make specified annual payments, to expend certain amount annually on exploration or development, to issue common shares of the Optionee and to assume all the costs for maintaining the Tenures. If these conditions are met, at the end of the specified period of XX years, the Optionor transfers title to the Tenures to the Optionee. In finding that the "optioning" under the agreement by the Optionor was a provision of natural resource rights in respect of an unproven property which s. 162(2)(a) deemed not to be a supply, CRA stated:

Strictly speaking, an option to acquire something is not necessarily the same as acquiring the thing itself and an option to acquire something is generally considered to be a supply. However…we do not consider the Optionor to be making a separate supply of the option. As long as the Optionee meets its obligations, it will automatically acquire the Tenure. It will be deemed to have exercised the Option, and no further consideration is paid. The nature of the Agreement is similar to a conditional sales contract for the sale of a good, whereby title to the good passes automatically upon full payment of the consideration.

After noting that "special rules are in place in subsection 162(4) to eliminate the requirement to establish a value for certain property or services exchanged between a farmor and a farmee in a farm-out agreement that is entered into for the purpose of the exploration and potential development of real property for mineral deposits," CRA stated:

[B]y virtue of paragraph 162(4)(b), the farmee's contribution need not be valued for purposes of determining any tax on the property or services given by the farmor. This is achieved by deeming the value of the farmee's contribution as consideration for any property or service given by the farmor to the farmee under the agreement to be nil.

However, if part of the consideration given by the farmor for the farmee's contribution is a service or property (each of which is referred to as the farmor's additional contribution) that is not a natural resource right in respect of unproven property:

• the farmee is deemed to have supplied a separate taxable service to the farmor and this separate service is deemed to be consideration for the farmor's additional contribution; and
• the value of the farmee's service is deemed to be equal to the fair market value of the farmor's additional contribution.

CRA provided an example:

[A] GST/HST registered farmor supplies natural resource rights in an unproven property and transfers equipment with a fair market value of $8,000 to a farmee in return for the exploration and development of the unproven property, and a processing service to be provided by the farmee. The usual charge for the processing service performed by the farmee is $10,000. The farmor must charge the farmee tax calculated on the value of the equipment that the farmor is supplying to farmee (i.e., $8,000). In turn, the farmee is deemed to have supplied a service to the farmor for the same value of consideration that was paid for the equipment and must charge tax to the farmor, which is calculated on $8,000. The farmee must also charge the farmor tax on the processing service actually supplied.

However, the tax on the processing service is only calculated on $2,000 (the amount by which the value of the service exceeds the value of the equipment). Therefore, the farmee must charge tax on the total amount of $10,000 (the fair market value of the processing service).

Consequently, with respect to the ancillary supplies of property and services between the farmor and the farmee, each party is required to charge tax on the fair market value of the supply that they made and to pay tax on the fair market value of the supply that they received in return.