22 October 1998 GST/HST Ruling HQR0001228 - Royalty Paid for Gravel Purchases

                                                                        GST/HST Rulings and Interpretations
 Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Avenue
Vanier, ON K1A 0L5

Dear XXXXX

I refer to your facsimile message of May 22, 1998, addressed to XXXXX of XXXXX Technical Interpretations Services office, concerning the application of the Goods and Services Tax (GST) to royalties paid for gravel purchases, as more specifically detailed in the statement of facts below. All references are to the Excise Tax Act ("ETA"), unless where otherwise noted.

Statement of Facts and Transaction(s)

Our understanding of the facts, the transaction(s), and the purpose of the transaction(s) is as follows:

1. XXXXX has an agreement with XXXXX[.]

According to the Contract:

a) The term is XXXXX years;

b) XXXXX has the exclusive right to purchase and remove gravel from XXXXX land during XXXXX years of its term;

c) XXXXX is to process a minimum number of yards in XXXXX year of the Contract;

d) The purchase price is XXXXX per yard of gravel;

e) XXXXX is to pay to XXXXX [t]he sum of XXXXX before XXXXX of each year for the first ten (10) years;

f) Goods and Services Tax is to be applied and paid by XXXXX on each of the XXXXX payments; and

g) XXXXX bears the cost of extracting and removing the gravel.

2. The majority of the gravel removed from XXXXX pit site by XXXXX is spread on the public roads located within XXXXX[;]

3. Occasionally, XXXXX will get a request from a ratepayer for XXXXX to spread gravel on a private road;

1. These ratepayers are usually farmers and businesses that are involved in the XXXXX industry;

2. XXXXX usually complies with the request and invoices the ratepayer on a cost recovery basis for the service of placing gravel on the private road;

3. The amount invoiced covers only XXXXX fees paid to XXXXX for the gravel together with the handling and transportation costs;

4. XXXXX estimates that over the past several years, approximately XXXXX of the total gravel extracted and removed from XXXXX pit is sold to ratepayers, however, the number and percentage does vary from year to year;

5. Last year XXXXX received about XXXXX requests which it complied with;

6. XXXXX does not do any advertising for the sale of the gravel, and it only complies with requests when XXXXX has a crusher and hauler in the area doing work for it;

7. XXXXX as at the date of its written request for an application ruling, XXXXX is not registered for GST purposes;

8. XXXXX as at the date of its written request for an application ruling, is not required to be registered for GST/HST purposes as it qualifies as a 'small supplier' pursuant to s. 148 of the ETA; and

9. XXXXX has not been collecting GST on its supplies of gravel to its ratepayers.

Ruling Requested

1. Whether XXXXX is required to pay GST on its purchases of gravel from XXXXX[;] and

2. Whether XXXXX is required to charge GST on the gravel it supplies to its ratepayers.

Based on the facts set out above, we rule as follows:

1. XXXXX is required to pay GST on its purchases of gravel from XXXXX[;] and

2. As a small supplier, XXXXX is not required to charge GST on the gravel it supplies to its ratepayers.

Explanation

Subsection 165(1) of the ETA provides that, "Subject to this Part, every recipient of a taxable supply made in Canada shall pay ... tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply." The supply of gravel from XXXXX to XXXXX is a taxable supply and therefore GST is exigible.

The supplies of gravel by XXXXX to its ratepayers is not taxable because, as a small supplier, XXXXX is not required to be registered and therefore not required to collect tax.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to departmental interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-2560.

Yours truly,

Richard Aronoff
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate