Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 158436
Dear [Client]:
Subject: GST/HST INTERPRETATION
Election concerning the acquisition of a business or part of a business
Thank you for your letter in which you provided comments on the “Supply of business assets” portion of draft GST/HST Memorandum 3.7, Natural Resources. Your submission asks whether a supply of an interest in an individual “lease” of oil and gas property which may be operating under a joint venture agreement may constitute a supply of a business or part of a business for purposes of the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) election under section 167 of the Excise Tax Act (ETA). We regret the delay in responding to your query.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the ETA unless otherwise specified.
Subsection 167(1) outlines the criteria that must be met for persons to be eligible to use the election provided for under that subsection. Generally, this election is available where:
1. the supplier makes a supply of a business or part of a business that was established or carried on by the supplier; and
2. under the agreement for the supply, the recipient acquires ownership, possession or use of all or substantially all of the property that can be reasonably regarded as necessary for the recipient to be capable of carrying on the business or part of the business.
Whether a supply of an interest in a property which may be operating under a joint venture agreement will meet these criteria is a question of fact that must be determined on a case-by-case basis.
A “business” as defined under subsection 123(1) is an activity including a profession, calling, trade, manufacture or undertaking of any kind. GST/HST Memorandum 14.4, Sale of a Business or Part of a Business, (Memorandum 14.4) offers guidelines for determining whether a supply meets the criteria for the election: in particular, whether the supplier is selling and the recipient is acquiring a business or part of a business under the agreement for the supply.
Paragraph 9 of Memorandum 14.4 describes a “part of a business” as an activity that may be a functionally and physically discrete operating unit or an activity which supports or is related to the broader business but which is organized as a separate activity capable of operating on its own. The first example in paragraph 9 provides that the acquisition of a printing division of a pulp and paper establishment (purchase of inventory, machinery, production equipment, and goodwill) which has a physically discrete location and operating unit (that is, it has its own employees, customers, equipment) is a supply of a part of a business; whereas the second example consists of the supply of a tractor-trailer which is considered to be a supply of a single asset.
Paragraphs 24 and 25 of Memorandum 14.4 explain that the supply of an undivided interest in a joint venture (meeting certain criteria) by one of the co-venturers may be considered a supply of a business or part of a business for purposes of the election to the extent the recipient acquires all of that one co-venturer’s undivided interest in all of the joint venture property and the rights and obligations attached to this interest. The oil and gas examples following the paragraphs illustrate that the co-venturer must supply all of its undivided interest (Example 1) rather than only a portion of its undivided interest (Example 2). Moreover, the sale of the undivided interest in Example 1 that is considered to be a supply of a business or part of a business includes the interest in and to the leases, lands, and petroleum substances, and tangible property for the production and processing of petroleum substances.
It is our understanding based on your submission that the term “lease” may be used for holdings of a particular legal subdivision or unit of land in the oil and gas industry. Certain sales of leases may involve all of the properties held by a company in a particular field, covering a large geographical area, whereas smaller sales or “swaps” of individual leases, or small groups of contiguous leases may occur to improve operating efficiencies by consolidating a company’s holdings of producing leases in a particular field or area. Further, we understand that a joint venture arrangement will often have more than one lease, and a supplier may sell all of its interest in a particular lease to another person while retaining its interest in others.
It is a question of fact whether a sale of a “lease” or “an interest in a lease” within the context of your submission is a sale of a business or part of a business. Based on the general information included in your submission, the supply of an interest in an individual lease of oil and gas property which may be operating under a joint venture agreement would not be considered to be a supply of a “business or part of a business” for purposes of section 167. If any of your members would like certainty with respect to a particular transaction and the availability of the section 167 election, we would suggest that they submit a written request for a ruling with supporting documentation as well as their analysis and reasoning as to why the transaction is a sale of a business or part of a business.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation given in this letter is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-670-1339. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
William Parker
Special Provisions – FI Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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