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: 142194
Dear [Client]:
Subject: GST/HST RULING
Application of the GST/HST to the supply of certain engineering reports
Thank you for your fax concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of certain engineering reports. We apologize for the delay in providing this response.
The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island and 15% in Nova Scotia. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
We understand:
1. The Province of British Columbia supplies “water licences” (pursuant to the Water Act of British Columbia). The licences are for locations such as streams and rivers which hold the potential for the generation of hydroelectric power. The purchaser of a water licence would, subject to various approvals, have the right to develop the sites and sell the electricity generated to B.C. Hydro.
2. […] (the Engineer) evaluates locations for their potential to produce electricity. If the Engineer determines a particular site to be viable, they offer their engineering studies to companies that could develop the property.
3. The Engineer entered into an agreement with […] (Company A) dated [mm/dd/yyyy] regarding certain hydroelectric prospects (the Agreement). Schedule B to the Agreement included an “Overriding Royalty Agreement” (the Royalty Agreement).
4. Under the Agreement, Company A agrees to pay various fixed amounts payable at different stages and a royalty of not less than […]% and a maximum of […]% that is payable under the terms of the Royalty Agreement.
5. The Royalty Agreement provides that the Engineer is granted an “overriding royalty” as defined in Section 2.1 of Article 2 of the Royalty Agreement and the Engineer is to be paid an amount equal to a certain percentage of the gross proceeds (as defined in paragraph 1.1(h) of Article 1 of the Royalty Agreement) from the electricity generated by a hydroelectric plant that may be constructed in respect of the prospect.
6. The Engineer did not purchase or supply any water licences. Such licenses and any other regulatory approvals were subsequently obtained from the Province of British Columbia directly by Company A.
7. […].
RULING REQUESTED
You would like to know if section 162 applies to the supply made by the Engineer in respect of the Agreement.
RULING GIVEN
Based on the facts set out above, we rule that payments made to the Engineer in respect of the Agreement, including the Royalty Agreement are consideration for a taxable supply made by the Engineer and that section 162 does not apply in respect of the supply.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling given in this letter provided that: none of the issues discussed in the ruling are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
EXPLANATION
Generally, every recipient of a taxable supply made in Canada shall pay GST/HST calculated on the value of the consideration for the supply.
Subsection 162(2) deems the following supplies not to be supplies for the purposes of the GST/HST:
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),
(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, or
(d) a right to enter or use land to generate, or evaluate the feasibility of generating, electricity from the sun or wind,
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.
In order for subsection 162(2) to apply, one of the rights in any of the paragraphs of subsection 162(2) must have been supplied. The Engineer did not obtain nor did it possess a Province of British Columbia water licence or any other right which it could have supplied to Company A or Company B. Therefore, a right under paragraph 162(2)(a) was not supplied. Similarly, the Engineer did not supply a right of entry or user relating to a right referred to in paragraph (a). Consequently, paragraph 162(2)(b) does not apply. Paragraph 162(2)(d) only applies to the right to enter or use land to generate, or evaluate the feasibility of generating, electricity from the sun or wind. Consequently, this provision does not apply either.
Payments made to the Engineer pursuant to the Agreement are not computed by reference to the production from a natural resource as required by this paragraph. It is the CRA’s position that although water is a necessary element required in the operation of a hydroelectric facility, water does not produce electricity nor is electricity a product of water. As such, paragraph 162(2)(c) does not apply in respect of the payments made […] under the Royalty Agreement.
Payments made to the Engineer in respect of the Agreement, including the Royalty Agreement, are consideration for a taxable supply of the engineering study in respect of a specific site relating to the evaluation of the site and its potential for the generation of hydroelectric power. There are no provisions which zero-rate or exempt the supply made pursuant to the Agreement in respect of each site. As a result, supplies made pursuant to the Agreement by the Engineer to Company B in the Province of British Columbia are taxable and subject to the GST/HST pursuant to section 165 at the applicable rate depending on when the supply was made.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-9585. 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,
Ben Boboski
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
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