GST/HST Rulings and Interpretations
9th Floor, Tower C
25 McArthur Road
Vanier ON
XXXXX K1A 0L5
XXXXX Case: HQR0000569
Dear XXXXX
Thank you for your letter of February 17, 1997 (with attachments). In this letter you present four fact scenarios and you ask how section 162 of the Excise Tax Act (ETA) would apply to each one. Section 162 of the ETA states that the supply of any right to explore for or exploit a forestry resource, the supply of a right of entry or user relating to such a right, or the supply of any right to a royalty or profit interest in relation to a forestry resource is deemed not to be a supply for the purposes of the goods and services tax (GST) and the harmonized sales tax (HST) and, as a result, no GST or HST is payable on that supply.
In the letter that follows, I will describe each of the four fact scenarios and describe how the ETA applies to that fact scenario. The relevant facts for each situation are taken from your letter of February 17, 1997 and the attachments to that letter. It is assumed that all of the transactions take place outside of the harmonized provinces and that therefore HST is not applicable.
SCENARIO 1
Relevant Facts
In the first fact scenario a logging contractor enters into a contract (the "loan agreement") with a lumber mill whereby the lumber mill agrees to lend XXXXX to the contractor to enable the contractor to purchase a specified tract of real property (the "property"). In return, the lumber mill gets a first mortgage on the property, an escrow agreement, a right of first refusal on future timber sales from the property, and a second contract (the "timber agreement") that allows the lumber mill to cut and take merchantable timber from the property for a specified period of time. Under the loan agreement, the loan will be repaid by having the contractor assign to the lumber mill XXXXX from the price paid by the lumber mill to the contractor for timber delivered from the property to the mill by the contractor.
The relevant terms and conditions of the timber agreement are the following:
1. The term of the agreement is XXXXX . The term may be extended should certain specified situations arise.
2. The contractor gives to the lumber mill the exclusive right to enter the property to cut and remove all of the merchantable timber from the property during the term of the agreement.
3. The contractor shall, on behalf of the lumber mill, cut and deliver to the lumber mill all of the merchantable timber on the property. The contractor shall use its own equipment and be responsible for all charges with respect to the removal of the timber.
4. The lumber mill shall pay to the contractor XXXXX for the logs delivered to the lumber mill (from which XXXXX will be deducted pursuant to the loan agreement).
5. If the contractor does not commence logging within XXXXX days of being advised by the lumber mill to do so, the lumber mill may, at its discretion, hire a third party to extract timber from the property. If it does so, the lumber mill will pay the contractor only XXXXX for any logs delivered to the lumber mill. The entire XXXXX will be used to repay the loan.
6. At the end of the term of the agreement, any timber not removed from the property becomes the property of the contractor.
I am assuming for the purposes of this fact scenario that the loan of XXXXX by the lumber mill to the contractor fulfills all of the necessary conditions of a loan, and that no other relevant supplies are being made between the lumber mill and the contractor.
Interpretation Given
It is the Department's position that the payment of XXXXX by the lumber mill to the contractor is consideration for the supply of a timber extraction service, and is therefore subject to GST.
It is also the Department's position that the payment of XXXXX by the contractor to the lumber mill is for the repayment of a loan, and is therefore not subject to GST pursuant to the definition of "financial service" found in subsection 123(1).
Further, it is the Department's position that in the event that the lumber mill hires a third party to extract the timber, the payment XXXXX by the lumber mill to the contractor is the payment of a fee or royalty charged in respect of the right to exploit the timber resource, and is therefore deemed not to be consideration for a supply pursuant to subsection 162(1).
Finally, it is the Department's position that the following supplies made by the contractor to the lumber mill are not subject to the GST. In return for the payment of XXXXX to the contractor, the lumber mill receives the following supplies from the contractor: a first mortgage (which includes an escrow agreement), a right to exploit the timber resource on the property, a right to access the timber resource on the property, and a right of first refusal on all future timber extraction from the property. Subsection 162(1) applies to the supplies of the rights to exploit the timber resource and to access the timber resource, and therefore GST does not apply to the supply of these rights. Similarly, pursuant to section 134, the supply of the first mortgage and the escrow agreement are deemed not to be supplies for the purpose of the ETA and therefore GST does not apply to this supply either.
The right of first refusal on all future timber sales is the supply of intangible personal property and is thus normally subject to GST. In this case, however, no consideration was given for this supply as the provision of a loan which will be fully repaid is not usually considered to be consideration for a supply. Thus in this particular case no GST is exigible on the supply of the right of first refusal because no consideration was given for its supply.
SCENARIO 2
Relevant Facts
In the second fact scenario, a logging contractor enters into an agreement with a private landowner whereby the contractor acquires the right to enter into the landowner's property and remove any timber from it. In return the contractor pays the landowner XXXXX of timber produced from the property. The contractor then agrees with a lumber mill to deliver the timber from the property to it for XXXXX To ensure that the landowner is paid, the parties agree that the lumber mill will withhold XXXXX from the amount owing to the contractor for the supply of the timber and remit it directly to the landowner. The contractor and the lumber mill are registrants.
Interpretation Given
It is the Department's position that the supply of the right to enter the property and remove the timber from it is of a right to exploit a forestry resource. Furthermore, pursuant to Policy Number P-110, Amounts paid for supplies of minerals, peat, or forestry, water or fishery products, the payment of XXXXX for timber extracted from the property is considered to be a fee or royalty charged in respect of the right to exploit the timber resource. Thus the payment of XXXXX to the landowner is not subject to the GST pursuant to subsection 162(1).
It is also the Department's position that the XXXXX paid by the lumber mill to the contractor is subject to the GST. This amount is considered to be consideration for the sale of the logs which is a supply of tangible personal property and therefore subject to the GST.
In the above fact scenario there are two transactions occurring. The contractor is supplying timber to the lumber mill logs and receiving in return XXXXX As described above this transaction is subject to the GST. The second transaction is the supply by the landowner to the contractor of a right to exploit a forestry resource. This supply is subject to subsection 162(1) and is therefore deemed not to be a supply for the purposes of the ETA. Therefore this supply is not subject to the GST.
SCENARIO 3
Relevant Facts
In the third fact scenario, a lumber mill enters into a contract with a registered individual whereby the lumber mill pays the individual XXXXX to enable the individual to acquire a particular piece of property. Under the contract all of the standing timber on this property belongs wholly to the lumber mill, who has the right to enter the property and remove the timber at any time once legal title to the property is transferred to the individual. All of the timber is required to be removed by June 30, 1994 at the latest. Other relevant terms and conditions in the contract are the following: the individual cannot resell or mortgage the land until the lumber mill has finished removing all of the timber; the individual and the lumber mill will agree to a logging plan before logging commences; and the individual is responsible for any cleanup of the property after the timber is removed. The cost of the property for the individual is approximately XXXXX
I am assuming for the purposes of this fact scenario that no other relevant supplies are being made between the lumber mill and the contractor.
Interpretation Given
It is the department's position that the registered individual is supplying to the lumber mill a right to exploit a forestry resource. Thus pursuant to section 162 the consideration of XXXXX for this right is not subject to the GST.
In your letter you ask whether Technical Information Bulletin B-073, Sale of Freehold Mineral Titles, would apply to this fact situation. That bulletin applies where there is a sale of a freehold interest in a mineral resource. The bulletin states that the sale of a freehold interest in a mineral resource is to be treated as the sale of real property and therefore the sale of such property is governed by the rules in the ETA that apply to the supply of real property. In the present case, however, the sale of the timber on the property is not a sale of real property for the purposes of the Excise Tax Act only. For the purposes of the ETA it is considered to be a sale of tangible personal property. Thus Technical Information Bulletin B-073 does not apply.
With respect to your further questions about distinguishing between a business and an adventure or concern in the nature of trade, these questions are only relevant to this fact scenario if the sale of standing timber was considered to be a sale of real property. Since this is not the case, it is not necessary to respond to these questions in this letter.
SCENARIO 4
Relevant Facts
The facts are the same as for scenario 3, except that the individual is not a registrant.
Interpretation Given
It is the department's position that the individual is supplying to the lumber mill a right to exploit a forestry resource. Thus pursuant to section 162 the consideration of XXXXX for this right is not subject to the GST.
I hope that the above information is helpful to you. If you have any questions, do not hesitate to contact me at 613-957-8253.
Yours truly,
Gregory Smart
Rulings Officer
Industries Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate
Legal References: 123(1) real property, 134, 162(1)
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Originator's Desk Copy
NCS Subject Code(s) - I 11845-04, 11667-04 |
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