30 May 2007 GST/HST Ruling 87138 - Sale real property by XXXXX (the "Estate")

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.

Dear XXXXX:Thank you for your fax XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of rights under an option Agreement (the "Agreement") between XXXXX and XXXXX.

All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, unless otherwise specified.

Statement of Facts

Our understanding of facts and transactions is as follows:

1. XXXXX (the "Optionor") owns a XXXXX% interest in the mining claims located in XXXXX (the "Property") duly staked and recorded in the Mining Recorders Office and the claims are held free and clear of all encumbrances.

2. The Optionor and XXXXX (the "Optionee") entered into the Agreement XXXXX.

3. The Optionee was able to earn a XXXXX% interest subject to a XXXXX Royalty XXXXX payable to the Optionor, by making cash payments and issuing shares to the Optionor and completing work requirements as outlined in the Agreement.

4. The Optionee had the right to purchase the XXXXX at a time at particular amounts as set out in the Agreement.

5. The Optionor is in the business of performing exploratory drilling and registering land claims in XXXXX. The Optionor does exploration work, drills test holes and then stakes claims.

6. As the representative for the Optionor, you have advised that the terms of the Agreement were carried out by the parties such that rights to the Property were given to the Optionee and consideration was received by the Optionor. The amounts received under this Agreement represent the only revenue the Optionor has at this time.

7. You advised that the Optionee's business is mining exploration and development. The natural resources being explored for and exploited are base minerals. You also advised that these natural resources when extracted are not in a form suitable for sales to consumers by the Optionee.

You have requested rulings regarding the application of GST to the supply of rights under the Agreement as well as eligibility for GST/HST registration and input tax credits (ITCs). As discussed and agreed upon, an interpretation is more appropriate regarding GST/HST registration and ITCs. Following the ruling given, an interpretation is provided regarding the eligibility to register and claim ITCs.

Ruling Requested

You would like to know whether GST is applicable to the supply of rights under the Agreement.

Ruling Given

Based on the facts set out above, we rule that GST/HST is not applicable to the supply of rights under the Agreement for which cash, shares and royalty income are payable to the Optionor.

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

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), or

(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,

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.

Subsection 162(3) provides that subsection (2) does not apply to a supply of a right to take or remove forestry products, products that grow in water, fishery products, minerals or peat, or a right of entry or user relating thereto, where the supply is made to a consumer or a person who is not a registrant and who acquires the right in the course of a business of the person of making supplies of the products, minerals or peat to consumers.

The supply of rights under the Agreement are deemed not to be a supply and the consideration paid is deemed not to be consideration for that right in accordance with subsection 162(2).

Please note that our comments and ruling regarding the application of GST/HST to the Agreement are restricted to the supply of rights under the Agreement. We have not considered other possible transactions such as the transfer of title to the Property to the Optionee to be held in trust. Should you wish to have our comments regarding such transactions, we would require details regarding the transaction.

Interpretation Requested

Is the Optionor entitled to register for GST/HST purposes and claim ITCs? Would their status as a GST/HST registrant have an effect on the ruling provided above?

Interpretation Given

Registration for GST/HST purposes

Subsection 240(1) requires that every person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada is required to be registered for GST/HST purposes. Subsection 123(1) provides that a "commercial activity" is defined to include a business carried on by the person, or an adventure or concern of the person in the nature of trade, except to the extent to which the business, adventure or concern involves the making of exempt supplies by the person.

One exception to the general requirement to register is where the person is a small supplier. In general, subsection 148(1) provides that a person is a "small supplier" throughout a particular calendar quarter and the following month if the total consideration that became due, or was paid without becoming due, for taxable supplies made by the person, or an associate of the person, in the previous four calendar quarters did not exceed a threshold of $30,000.

Where amounts received for the supply of a right to explore for or exploit natural resource are deemed not to be consideration for a supply, such amounts are not included in the calculation of the small supplier threshold. Therefore, where the revenue received by the Optionor under the Agreement constitutes all of the Optionor's revenue, the Optionor would not be required to be registered for GST/HST purposes.

However, subsection 240(3) provides, in part, that registration for GST/HST purposes is permitted for a person who is not required to be registered and who is engaged in commercial activity in Canada.

Supplying rights to explore for or exploit a natural resource is a commercial activity for GST/HST purposes. Therefore, a person supplying such rights would be entitled to register. Whether the person supplying such rights is registered for GST/HST purposes or not has no impact on the application of subsections 162(2) and (3) to the supply of such rights.

Entitlement to claim ITCs with respect to exploration for minerals

Subsection 169(1) generally provides that a registrant may claim an ITC for the GST/HST paid or payable on property or a service based on the extent to which the registrant acquired or imported the property or service for consumption, use or supply in the course of the registrant's commercial activities.

Section 141.01 sets out rules for determining the extent to which a property or service is acquired for consumption, use or supply in the course of commercial activities. The effect of the section is that a registrant will generally be entitled to claim ITCs in respect of its purchases only to the extent that the property or service has been acquired or imported for the purpose of making taxable supplies for consideration.

Subsection 141.01(7) states that where a provision deems consideration for a supply not to be consideration for the supply, a supply to be made for no consideration or a supply not to have been made by the person [for example, subsection 162(2)], that deeming does not apply for purposes of subsections 141.01(1) to 141.01(4).

Therefore, to the extent that property or a service was acquired or imported for consumption, use or supply in supplying rights to explore for or exploit a natural resource, ITCs are generally allowed where all other conditions for claiming ITCs are met.

Further information regarding the eligibility rules for ITCs can be found in GST/HST Memoranda Series 8.1, General Eligibility Rules, available on our Web site. Paragraphs 31 to 36 of this publication provide details regarding the application of subsections 141.01(1) to 141.01(4).

The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 306-975-6214.

Yours truly,

Cheryl McKenzie
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2007/05/23 — RITS 87244 — 83% GST/HST Rebate for Hospitals – Long-Term Care Operations