27 March 1998 GST/HST Interpretation HQR000006 - GST/HST on Gifts of Fee Simple Mines and Minerals and Assignments of Petroleum and Natural Gas Leases

                                                                        GST/HST Rulings and Interpretations
 Directorate
Place Vanier, Tower C, 9th Floor
25 McArthur Avenue
Vanier, Ontario
 XXXXX                                                                                K1A 0L5

Dear Sir:

Thank you for your letter of October 31, 1994, (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to transfers of fee simple mines and minerals interests and assignments of petroleum and natural gas leases. We apologize for the delay in responding to your letter.

You state that you often act for clients who, for estate planning purposes, transfer title to fee simple mines and minerals interests to their children for no consideration. In some circumstances, the minerals are subject to a standard Canadian Association of Petroleum Landmen petroleum and natural gas lease. A copy of this standard Canadian Association of Petroleum Landmen lease agreement was included in your submission. Where the minerals are subject to petroleum and natural gas leases, the leases are ordinarily assigned to the children at the same time as the transfer of title to the fee simple mines and minerals interests. However, you stated in a telephone conversation with XXXXX Tax Services Office XXXXX that in some instances, your clients wish to retain their interests in the leases as a source of income for a period of time after the time of transferring title to the fee simple mines and minerals interests.

Interpretation Requested

You request an interpretation on the application of the GST/HST for the following scenarios:

1. Where, for estate planning purposes, a parent, for no consideration, transfers fee simple mines and minerals interests title and assigns a petroleum and natural gas lease (in respect of the minerals) to his/her child at the same time.

2. Where, for estate planning purposes, a parent, for no consideration, transfers fee simple mines and minerals interests title to his/her child and, at a later time, assigns a petroleum and natural gas lease (in respect of the minerals) to that child.

Interpretation Given

Based on the information provided, we present the following general comments.

Scenario 1

The transfer of title to fee simple mines and minerals interests and the concurrent assignment of the petroleum and natural gas lease is considered a taxable supply for purposes of the GST/HST. Please refer to the enclosed Technical Information Bulletin B-073 Sale of Freehold Mineral Titles for more details on this matter. Further, where title is transferred from a parent to a child, the supply is a non-arm's length supply. In a non-arm's length transaction, pursuant to section 155 of the Excise Tax Act (ETA), the value of the consideration for the supply is deemed to be equal to the fair market value of the taxable supply of the property or service where the recipient is not a registrant acquiring the property or service for consumption, use or supply exclusively in the course of commercial activities of the recipient. Where no consideration has been paid in respect of the supply, section 155 of the ETA also provides that the deemed consideration equal to the fair market value of the supply is deemed to have been paid at the time that the supply was made. Thus, where the child is not a registrant or is acquiring the title to the fee simple mines and minerals interests and lease assignment otherwise than for consumption, use or supply exclusively in the course of his/her commercial activities, the child is liable to pay, at the time the supply is made, GST/HST calculated on the fair market value of the supply.

Scenario 2

The interpretation with respect to the transfer of title to fee simple mines and minerals interests is the same as provided in Scenario 1. The supply is considered a taxable supply for purposes of the GST/HST and subject to section 155 of the ETA where the child is not a registrant or is acquiring the title to the fee simple mines and minerals interests and lease assignment otherwise than for consumption, use or supply exclusively in the course of his/her commercial activities.

The subsequent assignment of the standard Canadian Association of Petroleum Landmen petroleum and natural gas lease is a supply of a right to an amount computed by reference to the production (including profit) from, or to the value of production from, a mineral deposit. Subsection 162(1) of the ETA deems the supply of such a right not to be a supply and any consideration paid or due, or any fee or royalty charged or reserved, in respect of the right is deemed not to be consideration for the right.

Please note that the interpretation provided in Scenario 2 is based on certain transactions, the legal effect of which the Department is not in a position to comment on. Our interpretation is necessarily very broad and is provided within the context of actions undertaken for bona fide estate planning purposes. The Department is interested in determining the legal manner that you utilize wherein your client retains his/her interests in a petroleum and natural gas lease after transferring title to the fee simple mines and minerals interests. We invite you to send us an analysis of this undertaking and would be pleased to provide more definitive comments or a ruling on this particular matter.

Please note that on April 1, 1997, the provincial sales tax (PST) in three participating provinces, Nova Scotia, New Brunswick, and Newfoundland, was unified with the GST to create the HST. The HST, at a rate of 15%, replaces both PST and GST on supplies that are made (or considered to be made) in the participating provinces and applies to the same base of goods and services as the GST. In the event that you provide goods or services in a participating province, please contact our office for further information regarding the HST application to the supplies.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST Memoranda Series, do not bind the Department with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 941-3971.

Yours truly,

Robert Smith
A/Senior Rulings Officer
Industries Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate

Encl.