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: 150533
Dear [Client]:
Subject: GST/HST INTERPRETATION -
Application of Section 162 to Forestry […] Management Agreements
[…]
Thank you for your letter of December 5, 2012, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to forestry […] management agreements.
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.
You wrote in response to an interpretation issued to your firm by the […] Region of the Canada Revenue Agency (CRA) on [mm/dd/yyyy], case number […]. We understand that you do not agree with the following statement made in that interpretation:
“Where a licence holder has not transferred their licence to a third party but allows that third party access to timber resources, the licence holder would generally be viewed as making a supply of timber. Then, should the licence holder seek reimbursement of their expenses (e.g., the stumpage fees they were required to pay to […][Province A]), the amount they collect as a reimbursement would in general form part of the consideration for their supply of timber (unless those expenses were incurred as agent).”
INTERPRETATION REQUESTED
You would like to know whether the CRA agrees with your view that the application of section 162 can occur where a licence holder does not transfer the licence issued under […][Province A] [legislation] to a third party who has been given access by the licence holder to the timber resource.
INTERPRETATION GIVEN
The transfer of the licence is not a requirement for purposes of applying section 162.
In your letter, you quoted example 2 in Policy Statement P-110R, Amounts Paid for Supplies of Minerals, Peat, or Forestry, Water, or Fishery Products where a supply of a right to exploit a forestry resource is made, and to which section 162 applies to exclude the application of the GST/HST. Example 2 provides as follows:
Statement of facts
1. ABC supplies to DEF the exclusive right to enter ABC's land for the purpose of accessing standing timber reserves on the lands, and cutting and removing the timber.
2. DEF will pay a royalty rate of $30 per cubic metre of cut timber to ABC under the agreement.
3. DEF is not a consumer or a non-registrant who acquires the right in the course of a business of supplying the timber to consumers.
Decision
The amount of $30 per cubic metre of timber removed is not subject to tax.
Rationale
DEF has acquired the right to explore for or exploit a forestry resource, and the royalty payment that DEF makes to ABC for the timber is considered to be a fee or royalty charged or reserved in respect of the right to explore for or exploit a natural resource. The royalty payment would therefore be deemed not to be consideration for the right pursuant to subsection 162(2) of the ETA.
You asked whether the tax treatment would be the same if the supplier in that example had held a forestry licence and made the same supply, without supplying the licence itself. The example is silent on whether the supplier holds or does not hold a licence of any kind. By licence we mean permission by the Crown ([Province A] in your case) to cut trees on Crown land in a given area.
The nature of the supply determines whether section 162 applies. If the supply is a right to exploit a forestry resource, as provided for under paragraph 162(2)(a), the supply of that right is deemed not to be a supply and therefore is not subject to the GST/HST. In the context of your question, the issue is whether one party to an agreement is supplying a right to exploit the forestry resource, or is the other party supplying a service of cutting trees (i.e., felling the trees and other related activities)?
Where a person does not receive title to the timber and provides a service of cutting trees, the person is not considered to be exploiting a forestry resource for purposes of section 162. In paragraph 9 of draft Memorandum 3.7 Natural Resources (released for public discussion in February 2012), exploitation in a forestry context is described as “the harvesting of trees”. But in the context of section 162, harvesting does not mean simply cutting down trees. Paragraph 7 of draft Memorandum 3.7 states, in part, that, “The common meaning of exploit is to make productive use of or to utilize”. Various dictionary definitions of the term refer to “turning to account” or similar descriptions. A person, who cuts trees where the timber remains the property of the person who was originally granted the right to exploit the resource , is not utilizing the resource or turning it to account. Section 162 addresses supplies of rights to exploit a resource. A person who merely agrees to cut down trees belonging to another is not the recipient of a supply of a right to exploit the resource; they are the supplier of a service of cutting trees.
You submitted a sanitized agreement between your company (referred to in this letter as B Co) and a forestry management company (referred to in this letter as A Co) in your submission to the […] Region. You subsequently submitted a second agreement to us which you state is more typical of the agreements you enter into. Our comments on the two agreements follow:
First agreement
The following are the relevant points from the preamble of the first agreement: A Co and B Co both hold forestry licences under [Province A] [legislation]; A Co carries on the business of forestry management; A Co will manage and harvest timber within B Co’s licences; and a certain volume of cut trees will be attributed to A Co’s licences.
The following are the provisions from the body of the agreement that are relevant to the issue at hand: […][specific provisions of the agreement]
As noted above, the agreement contains provisions for various payments to be made by each party to the other. However, none of these payments are consideration for supplies that come within section 162. In substance, the purpose of the agreement is for A Co to supply to B Co a service of cutting trees. This position is supported by the fact that section […] of the agreement states that title to the felled timber passes to B Co when the timber is felled in accordance with the applicable B Co licence. This position is further supported by the fact that pursuant to paragraph […] to the agreement title to the felled timber can only pass to A Co once B Co chooses not to accept the felled timber.
Section […] of the agreement provides that A Co will carry out Services and Harvesting Activities to achieve the results specified in the Forestry Documents. […]. The services described in paragraph […] do not constitute a supply that comes within section 162.
Paragraph […] of the agreement and paragraph […] to the agreement provide that B Co will pay for harvested timber that is accepted by B Co. Although B Co is paying for logs that it accepts, this does not necessarily mean that B Co is buying logs qua logs. Under section […], title, risk of loss and possession to the harvested timber pass to B Co when the timber is felled, and the only logs A Co takes title to are the logs that B Co does not accept under paragraph […]. These logs are acquired by A Co for no additional consideration. Since B Co already owns the logs, the amounts paid by B Co are not consideration for a supply of logs by A Co but would appear to be compensation paid to A Co for cutting the timber.
The question of whether the agreement transferred title to the felled timber to A Co was addressed in telephone conversations and e-mails between yourself and Raymond Labelle. When reviewed chronologically, they support the position that title remains with B Co. The relevant portions of the various telephone conversations and e-mails are reproduced here.
In a telephone conversation on [mm/dd/yyyy], the following information was obtained.
The many types of contracts can be divided in two categories; those where there is a transfer of ownership of the timber from the licence holder to the harvester, and those where the licence holder keeps the ownership of the timber. Your understanding is that where there is a transfer of ownership from the licence holder to the harvester the effects are as follows: The standing timber is owned by the Crown. As soon as it is cut, its ownership is transferred to the licence holder and, then immediately, the ownership is transferred to the harvester. We note that this is not reflected in the agreement above. You also explained that you have contracts where the harvesters simply supply the service of cutting the trees for the licence holder who keeps the ownership of the timber. It is this latter type of contract that is more closely reflected in the agreement above.
[…][additional information provided]:
[…] title passes from the Crown to […][i.e., B Co] when the tree is felled and then immediately to the party to whom the harvest rights were assigned….The contractual holder of the harvesting rights between the […] holder and the harvesting party has paid for and acquired the ‘right to harvest the timber’ notwithstanding there has been no formal transfer of the timber […].”
[…][additional information provided]:
“....you are correct in that […] the agreement provides that 1. […][i.e., B Co] has to pay fmv for the logs that it accepts notwithstanding it retains legal title to these logs after they are felled […]
[…].
Section […] of the agreement provides that the parties agree that the agreement is not a disposition under section […] of the provincial [legislation] of a B Co licence or interest in a licence. Although not conclusive, this supports the position that A Co does not receive any right to exploit the resource as that term is understood for purposes of section 162.
To summarize, it is our position that the supplies made under this first agreement are not supplies of a right to explore for or exploit a natural resource for the purposes of section 162. The agreement is in substance an agreement for the supply of a service of cutting trees and related activities and the consideration for the supply of the service is subject to the GST where the supply is made in a non-participating province.
Second Agreement
The recital to the agreement sets out the basic scheme of the agreement. B Co is the holder of a forest licence authorizing the harvest of certain timber from areas within the timber supply area associated with that forest licence and also the holder of a tree farm licence authorizing the harvest of certain timber from areas within the B Co tree farm licence. A Co is the holder of a forest licence authorizing the harvest of certain timber from areas within the associated timber supply area. A Co and B Co are each engaged in the business of manufacturing and marketing specialty forest products to world markets. Under paragraph D of the recital, the parties agree that B Co will grant A Co the right to harvest timber under the B Co licences and that A Co will (i) further develop and manage the Partially Developed B Co Cutting Permits, and (ii) develop and manage the Developable B Co Cutting Permits, and cause approximately XXX m3 of timber to be harvested pursuant to the B Co cutting permits to be used for its own consumption at its mills on the terms and conditions contained in the agreement.
The agreement also provides in paragraph […] of the recital that A Co will grant B Co the right to harvest timber under the A Co forest licence and that B Co will further develop and manage the Partially Developed A Co Cutting Permits, and cause approximately XXX m3 of timber to be harvested pursuant to the Partially Developed A Co Cutting Permits and, except as otherwise provided in the agreement, used for its own consumption at its mills on the terms and conditions contained in the agreement.
[…][provisions of the agreement]
This agreement provides for the making of two supplies by each Harvesting Party. One supply is described in the agreement as the right to harvest timber as set out in section […] of the agreement. The other supply is the provision of the licence holder’s planning, engineering and assessment work (PEAW) set out in section […] of the agreement.
As noted earlier, example 2 in Policy Statement P-110R states that the right to enter another's land for the purpose of accessing standing timber reserves on the lands, and cutting and removing the timber, is a right that comes within section 162 and therefore is not subject to tax. In this case, the agreement gives each Harvesting Party the right to harvest timber covered by each other’s licences. The agreement also makes it clear that the harvested timber becomes the property of the Harvesting Party at the moment it is felled. Thus, the agreement is not for a supply of cut timber, which would be a supply of tangible personal property. Nor is the agreement for a supply of a service of cutting trees, since title to the cut timber passes from the licence holder to the Harvesting Party. Furthermore, if the agreement was for a supply of a service of cutting trees, the Harvesting Party performing the cutting would be receiving payment, not making payment. Based on the information provided, it is our view that the agreement provides for the supply of a right to exploit a forestry resource which is a supply covered by section 162.
As noted, section […] of the agreement provides that the licences held by each Harvesting Party are not being transferred. Although these licences give the licence holder the right to exploit the forestry resource in the area associated with the licence, the licence holder can still supply a right to exploit the forestry resource while at the same time retaining the original right, unless there is some condition in the grant of the original right (i.e., the licence) that prevents this. Thus, the fact that the licences are not transferred does not mean that there is not a supply of the right to exploit the forestry resource.
As mentioned earlier, there is another supply made pursuant to the agreement, and this is the supply of the PEAW set out in section […] of the agreement. Our view is that what is meant by the sale of PEAW is the sale of the results of the engineering and assessment work. This would not be a supply that is described in section 162 and would be taxable.
To summarize, the supply of the right to harvest the timber under this second agreement is a supply of a right to exploit a forestry resource that comes within section 162 and is therefore deemed not to be a supply. This does not include the supply of the PEAW set out in section […] of the agreement which is considered a taxable supply that is subject to the GST where the supply is made in a non-participating province.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretations given in this letter, including any additional information, are not rulings and do 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 interpretations or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-954-4397. 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,
Ken Syer
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
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