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: 151859
Business Number: […]
February 5, 2014
Dear [Client]:
SUBJECT: GST/HST RULING
Supply of a right-of-way
Thank you for your letter of March 11, 2013, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to payments received by you in respect of a supply of a right-of-way.
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 (effective April 1, 2013) and 15% in Nova Scotia. The GST applies in the rest of Canada at the rate of 5%.
Effective April 1, 2013, the 12% HST in British Columbia has been replaced by the 5% GST and a provincial sales tax.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
We understand the facts to be as follows:
1. You and your […][siblings], […], each own an undivided […] interest as tenants in common in a parcel of land legally described as […] (the Property).
2. The Property is being leased to a neighboring farmer who uses it in his farming operations. There is no residence situated on the Property.
3. You are registered for the GST.
4. In addition to the lease agreement with the farmer, on [mm/dd/yyyy], you and your [siblings] entered into two other agreements with […] (the Company), for the use of the Property.
5. Based on information on its website, we understand that the Company is […] operating in […][Province A].
6. Under […] (Agreement A), you and your [siblings] granted the Company an easement and right-of-way to survey, erect, install, inspect and maintain an electrical transmission line, and related telecommunication facilities, structures, and equipment (the Works) over and through […][a number of] acres […] of the Property.
7. Agreement A includes the following terms:
(a) Under section […], before beginning construction, the Company agreed to pay:
(i) pursuant to subsection […], the entry fee for the acreage within the Right-of-Way at the rate of $[…] per acre, which totals the sum of $[…];
(ii) additional consideration for the value of acreage within the Right-of-Way, a one-time payment at the rate of $[…] per acre, which totals the sum of $[…]; and
(iii) as a partial prepayment of compensation due for damages that may be caused by or arise out of the Company’s operation, the sum of $[…] for all general matters of disturbance peculiar to the first year and shall include, without limiting the generality of the foregoing, nuisance, inconvenience, goodwill, negotiation, all other costs and construction disturbances, if any, in the sum of $[…].
(b) Under section […], the Company also agreed to pay annual compensation of $[…] for each full steel tower structure place on cultivated land and $[…] for each full steel tower structure placed on uncultivated land within the Right-of Way.
(c) Section […] indicates that the rights, licences and easement granted will begin on the date of the agreement and will continue for such time as the Company wishes to exercise the rights. Furthermore, in the event the Company no longer requires the rights under the Agreement, it may elect to terminate the Agreement in which case it will remove the Works from the Property and, having done so, will discharge any instrument registered against the title to the Property.
(d) Section […] provides that the Company may assign the rights acquired under the Agreement to a purchaser of the Works.
8. Under […] (Agreement B), you and your [siblings] granted the Company a temporary easement for working space/access over [a number of] acres of the Property […] during the period [mm/dd/yyyy] to [mm/dd/yyyy]. The Company agreed to pay $[…], which includes an entry fee, as consideration for the temporary easement granted under Agreement B.
9. You also provided a copy of a letter from the Company outlining its breakdown of a payment made to you for your […] interest in the Property. The breakdown reads as follows: […]
The total amount payable to you is $[…] which represents your […] interest in the Property.
10. You confirmed in a telephone conversation that the Company has paid and will continue to pay the annual compensation as required under section […] of Agreement A.
RULING REQUESTED
You would like to know whether you are required to collect GST on all of the payments you receive from the Company.
RULING GIVEN
Based on the facts set out above, we rule that you are required to collect GST on all of the payments you receive from the Company under Agreements A and B.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
EXPLANATION
The supply of an easement or right-of-way over real property is a supply of real property for GST/HST purposes and as such is subject to the provisions in the ETA that apply to a supply of real property.
Where a right-of-way or easement gives the recipient the use of or right to use real property for a specified period of time without legal ownership in the underlying property, the supply would normally be considered to be by way of an arrangement similar to a lease.
Where the consideration for the supply of an easement relates to the actual grant or transfer of the equitable interest in the property and not to the use of or right to use the property, the supply would normally be considered as being in respect of the sale of real property. An easement granted in perpetuity for a single consideration or the transfer of the easement by assignment may constitute a sale.
In the case at hand, the terms of Agreements A and B are not indicative of a sale of an interest in the Property given the requirement to pay ongoing annual consideration under Agreement A and the specified period of use under Agreement B. Therefore, the interest granted is a supply by way of an arrangement similar to a lease or licence.
As a general rule a supply of real property located in Canada is a taxable supply unless a specific exemption applies. There is no exempting provision that applies to the supply of the right-of-way granted to the Company. Moreover, all of the payments made by the Company under Agreements A and B are consideration for that supply.
The ETA includes provisions that deem certain supplies not to be a supply and the consideration for a supply not to be consideration. Under paragraph 162(2)(d), a right to enter or use land to generate, or evaluate the feasibility of generating, electricity from the sun or wind is deemed not to be a supply and any consideration paid or due is deemed not to be consideration for the right. However, in the case at hand, the right to enter and use the land is for the erection of an electrical transmission tower that does not include the right to enter or use land to generate, or evaluate the feasibility or generating electricity from the sun or wind.
As a GST/HST registrant making a taxable supply of real property by way of an arrangement similar to a lease or licence, you are required to collect GST from the Company on all of the consideration payable under Agreements A and B.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 604-658-8544. 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,
Eric Paraskake
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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