Okanagan Opal Inc. v. The Queen, docket 2002-444(GST)I (Informal Procedure)

Date: 20020717

Docket: 2002-444-GST-I

BETWEEN:

OKANAGAN OPAL INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Little, J.

FACTS

[1]            In 1991 Mr. Robert Yorke-Hardy while acting as a prospector discovered "gem quality" opals on property known as the Klinker Property (the "Klinker Property") near Vernon, British Columbia. Mr. Yorke-Hardy acquired mineral claims on the Klinker Property pursuant to the provisions of the Mineral Tenure Act of British Columbia.

[2]            The Appellant was incorporated in 1993 under the laws of the Province of British Columbia.

[3]            Mr. Yorke-Hardy transferred the mineral claims that he had acquired in the Klinker Property to the Appellant and the Appellant carried on an exploration program on the property.

[4]            The Appellant also owned and operated a retail gem shop near Vernon, British Columbia.

[5]            The Appellant sold some of the opals obtained from the Klinker Property plus products made from gold to the public in its retail shop.

[6]            On the 10th day of April, 1996 the Appellant entered into an Agreement (the "Agreement ") with Canadian Northern Lites Inc. ("CNL"). CNL was not a registrant under the Excise Tax Act (the "Act").

[7]            The Appellant received the following payments from CNL pursuant to the Agreement:

                                May 31, 1997          —                             $225,000.00

                                May 31, 1998          —                             $175,000.00

[8]            The Minister of National Revenue (the "Minister") determined that the payments referred to above were subject to Goods and Services Tax ("GST") under the Excise Tax Act. The Minister imposed GST as follows:

                                1997                                         —                             $15,750.00

                                1998                                         —                             $12,250.00

ISSUES

[9]            The Appellant maintains that the amounts that were paid by CNL to the Appellant were amounts paid to permit CNL to carry on an exploration program on the Klinker Property and therefore the payments made by CNL to the Appellant were not subject to GST.

[10]          The Respondent maintains that the amounts paid by CNL to the Appellant were amounts paid to enable CNL to acquire an interest in the Klinker Property and therefore the Appellant must pay GST on the amounts paid to it by CNL.

ANALYSIS

[11]          In my opinion the Agreement is ambiguous in describing what was to take place between CNL and the Appellant. In interpreting the Agreement, I have considered the sworn testimony of Mr. Yorke-Hardy and Mr. Rossworn, C.A. Mr. Yorke-Hardy stated that he understood that the Agreement provided CNL with a right to explore for minerals prior to CNL exercising the option to purchase the Klinker Property (Examination-in-chief of Mr. Yorke-Hardy).

[12]          Mr. Murray Rossworn, C.A., was called as a witness by the Appellant. Mr. Rossworn referred to the Agreement and said:

...it was our understanding that it was basically a right ... that CNL was paying for a right to explore ... this property in order to see at some point whether or not they wanted to pursue a further deal. (Page 111 of transcript - l - 14-17)

[13]          Mr. Rossworn referred to the option payments made by CNL to the Appellant and said:

...I didn't really see it as being an option to purchase property or anything along those lines. It was ... it was really money that was being received to do further exploration work on the property. (Page 112 of transcript - l - 9-11)

[14]          Mr. Rossworn also said:

...in my view, when I read the agreement, the money was not being given to Okanagan Opal for any other purpose except so that Okanagan Opal could do some further exploration, so CNL could determine whether they did want to pursue the purchase. (page 115 of transcript - l - 4-7)

[15]          Section 162.(2) of the Excise Tax Act reads as follows:

162.(2) Natural resources -- For the purposes of this Part, the supply of

(a) a right to explore for or exploit a mineral deposit, a peat bog or deposit of peat or a forestry, water or fishery resource,

(b) a right of entry or user relating to a right referred to in paragraph (a), or

(c) a right to an amount computed by reference to the production (including profit) from, or to the value of production from, any such deposit, bog or resource,

shall be deemed not to be a supply and any consideration paid or due, or any fee or royalty charged or reserved, in respect of the right shall be deemed not to be consideration for the right.

[16]          I have carefully analyzed the terms and conditions contained in the Agreement and the testimony of Mr. Yorke-Hardy and Mr. Rossworn. In my opinion the Agreement gave CNL the right to explore for minerals. If CNL was satisfied with the information obtained from the exploration program, the Agreement provided CNL with an option to purchase the Klinker Property at a price of $8,000,000.00. (It should be noted that while CNL paid the amounts of $400,000.00 (or more) to the Appellant, CNL never exercised its option to purchase and CNL forfeited any interest that it may have obtained in the Klinker Property).

[17]          In my opinion the Appellant is exempt from GST on the amounts paid by CNL because of the wording contained in section 162.(2) of the Excise Tax Act.

[18]          The appeal is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment.

Signed at Vancouver, British Columbia, this 17th day of July 2002.

"L.M. Little"

J.T.C.C.

COURT FILE NO.:                                                 2002-444(GST)I

STYLE OF CAUSE:                                               Okanagan Opal Inc. and

                                                                                                Her Majesty the Queen

PLACE OF HEARING:                                         Kamloops, British Columbia

DATE OF HEARING:                                           June 11, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge L.M. Little

DATE OF JUDGMENT:                                       July 17, 2002

APPEARANCES:

Counsel for the Appellant: Robert A. Lundberg

Counsel for the Respondent:              Michael Taylor

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Robert A. Lundberg

Firm:                  Robert A. Lundberg

                                                                                                Revelstoke, British Columbia

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2002-444(GST)I

BETWEEN:

OKANAGAN OPAL INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on June 11, 2002, at Kamloops, British Columbia, by

the Honourable Judge L.M. Little

Appearances

Counsel for the Appellant:          Robert A. Lundberg

Counsel for the Respondent:      Michael Taylor

JUDGMENT

          The appeal from the assessment made under Part IX of the Excise Tax Act, for the period June 1, 1996 to May 31, 1998, notice of which is dated August 23, 2000 and bears number 12260900100, is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

Signed at Vancouver, British Columbia, this 17th day of July 2002.

"L.M. Little"

J.T.C.C.