Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
XXXXX
XXXXX
XXXXX
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 113793
Business Number: XXXXX
Attention: XXXXX
September 9, 2010
Dear XXXXX:
Subject:
GST/HST RULING
Lease of land to a mining company
This letter is further to XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to land leased by XXXXX.
We understand that XXXXX, you discussed XXXXX, two issues regarding the lease of real property by XXXXX. One of the issues was addressed in the above-referenced ruling. This ruling concerns the remaining issue, namely, the application of the GST/HST to land leased by XXXXX to a mining company. We apologize for the delay in this response.
HST applies at the rate of 15% in Nova Scotia, 13% in New Brunswick, Newfoundland and Labrador, and Ontario, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
Our understanding of the facts is as follows:
1. XXXXX is a municipality as defined under the ETA and is registered for GST/HST purposes.
2. XXXXX entered into a XXXXX lease agreement (the Lease), effective XXXXX, with XXXXX (the Lessee) for the supply by XXXXX of certain vacant municipal lands (the Leased Lands) XXXXX. A copy of the Lease was supplied for our review.
3. XXXXX of the Lease prohibits the Lessee from using the Leased Lands for any purpose other than XXXXX, including the construction and use of all buildings, structures, facilities, machinery, equipment, supplies, air strips, power, fuel and water supplies, roads and all other support and services facilities relating to the construction and operation of XXXXX.
4. Per XXXXX of the Lease, the Lessee shall not construct roads and/or remove timber, remove and/or use sand and gravel from the Leased Lands and/or divert surface and/or ground water without obtaining proper approval and permits from the applicable Government agencies.
5. In accordance with XXXXX of the Lease, the Lessee shall ensure that its XXXXX operations are limited to the Leased Lands and, in particular, XXXXX, the Lessee shall be solely responsible for any damages caused thereby and any removal and cleanup required.
6. XXXXX access road runs through the Leased Lands, XXXXX.
7. XXXXX of the Lease stipulates a starting rental rate of XXXXX plus applicable GST and provincial sales tax, XXXXX.
8. XXXXX of the Lease requires the Lessee to pay all royalties, charges, taxes, rates and assessments, whatever, whether municipal, provincial or otherwise which may be charged or become payable in respect of the occupation of the Leased Lands, rental of the Leased Lands, or of any business or operations conducted by the Lessee on the Leased Lands.
9. XXXXX of the Lease provides the Lessee with the option to renew the Lease XXXXX.
10. XXXXX of the Lease provides, in part, that upon termination of the Lease, or upon the Lessee's operations on the leased lands being ceased for any reason, the Lessee must, at its sole expense, comply with XXXXX approved plans for decommissioning, reclamation, abandonment and post-decommissioning monitoring of the Leased Lands.
Ruling Requested
You would like to know if the supply of the Leased Lands by XXXXX to the Lessee, as described in the Lease, is subject to the GST. Specifically, we have been asked to determine if subsection 162(2) will apply to the supply of real property made under the Lease.
Ruling Given
Based on the facts set out above, we rule that subsection 162(2) does not apply to the supply of the Leased Lands made by XXXXX to the Lessee under the Lease. As no other relieving provision applies, the GST is payable by the Lessee and is calculated on the value of the consideration payable for XXXXX supply of the Leased Lands.
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
Generally, a supply of real property made in Canada is subject to the GST/HST unless the circumstances of the supply satisfy a specific exemption or relieving provision.
Subsection 162(2) provides that for GST/HST purposes, 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 that right iFootnote 1. Therefore, supplies of rights described in subsection 162(2) are not subject to the GST/HST.
Paragraph 162(2)(a) pertains to the right to explore or exploit a mineral deposit, a peat bog, a deposit of peat or a forestry, water or fishery resource. The Lease does not grant the Lessee the right to explore or exploit any such resource. Rather, it allows the Lessee to use the Leased Lands for XXXXX, activities that occur after the exploration or exploitation of a mineral deposit has taken place. As such, paragraph 162(2)(a) does not apply.
In accordance with paragraph 162(2)(b), the supply of a right of entry or user relating to a right referred to in paragraph 162(2)(a) is also deemed not to be a supply. Therefore, whether a lease of property is a supply which falls within the scope of paragraph 162(2)(b) will depend on the express purpose(s) for which the lessee is granted use of the land. Given that the Lease does not confer upon the Lessee a right of entry or user related to a right referred to in paragraph 162(2)(a), paragraph 162(2)(b) does not apply to the supply in question. Furthermore, as neither paragraphs 162(2)(c) or (d) are relevant in this case, the supply of the Leased Lands falls outside of the scope of section 162.
Section 25 of Part VI of Schedule V to the ETA is the general exempting provision for supplies of real property made by many public service bodies. However, this provision does not apply to any supply made by a municipality for which the consideration became due after March 9, 2004, or was paid after March 9, 2004, without having become due, unless the supply is made under an agreement in writing entered into before March 10, 2004. The supply of the Leased Lands by XXXXX to the Lessee is excluded from exemption under section 25 of Part VI of Schedule V to the ETA, as the supply was made pursuant to an agreement entered into after March 9, 2004.
As no other exempting or relieving provisions apply, the supply of the Leased Lands made by XXXXX is subject to the GST.
The GST/HST is calculated on the value of the consideration for a taxable supply. The value of the consideration is defined under subsection 153(1) as
(a) where the consideration or that part of the consideration is expressed in money, the amount of the money; and
(b) where the consideration or that part is other than money, the fair market value of the consideration or that part at the time the supply was made.
In the case at hand, therefore, the value of the consideration for the supply of the Leased Lands would include:
i) the annual rent set out in XXXXX of the Lease;
ii) the fair market value of the improvements (that is, the new road) and the services required to be supplied by the Lessee under XXXXX of the Lease;
iii) any amounts identified under XXXXX of the Lease incurred by XXXXX and reimbursable by the Lessee; and
iv) any amounts identified in XXXXX of the Lease that are charged upon the Lands or assessed against XXXXX, as registered owner of the Leased Lands.
With respect to (ii) above, the value of the improvements (the road, in this case) and services are included in the value of the consideration because it is a requirement of the Lease that the Lessee undertake the improvements and services in order to retain possession of the land and as such, form additional consideration for the supply of the Lease Lands made by XXXXX.
With respect to (iii) above, while the Lessee may be responsible under the Lease to pay any increased taxes, rates and assessments levied by the local township or provincial authority as a result of the Lessee's use of the Leased Lands, the ultimate liability to pay the taxes, rates and assessments may rest with the property owner (that is, XXXXX). The governing provincial legislation (for example, XXXXX) ordinarily specifies who is to be assessed for the particular tax, rate, etc. Where a tenant is required under a lease agreement to pay a separate amount in respect of property taxes, etc, assessed against the owner of the property, the amount is generally included in the value of the consideration for the lease of the property, even if the lessee pays the amount directly to the taxing or charging authority. On the other hand, amounts assessed directly against the Lessee and for which XXXXX has no liability would not be included in determining the value of the consideration for the supply of the Leased Lands made by XXXXX.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at XXXXX. 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,
XXXXX
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
XXXXX
i 1. Paragraph 162(2)(d) applies to supplies made on or after February 26, 2008. It also applies to supplies made before that date but only in respect of the portion of the consideration for the supply that becomes payable, or is paid without having become payable, on or after February 26, 2008.
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