1 December 2000 GST/HST Ruling 7622 - Royalty Paid for Gravel Purchases

Dear XXXXX

I refer to our ruling letter XXXXX, on the above noted subject. After having reviewed the facts of this case, we have concluded that the ruling, as it pertains to the purchases of gravel by the XXXXX (the "RM") from XXXXX XXXXX, was incorrect.

All references are to the Excise Tax Act (the "ETA"), unless where otherwise noted.

Statement of Facts

The following facts are those contained in the XXXXX, ruling letter.

1. The RM has an agreement (the "Contract") with XXXXX;

According to the Contract:

a) The term is XXXXX years;

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

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

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

e) The RM is to pay to XXXXX the sum of XXXXX on or before the first day ofXXXXX of each year for the first XXXXX years;

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

g) The RM bears the cost of extracting and removing the gravel.

2. The majority of the gravel removed from the XXXXX pit site by the RM is spread on the XXXXX roads XXXXX;

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

4. These XXXXX are usually farmers and businesses that are involved in the XXXXX ;

5. The RM usually complies with the request and invoices the XXXXX on a cost recovery basis for the service of placing gravel on the XXXXX road;

6. The amount invoiced covers only the RM's fees paid toXXXXX for the gravel together with the handling and transportation costs;

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

8. Last year, the RM received about a dozen requests which it complied with;

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

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

11. The RM, 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

12. The RM has not been collecting GST on its supplies of gravel to XXXXX XXXXX.

Ruling Requested

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

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

Previous Ruling Given

The previous ruling issued XXXXX, stated that:

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

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

Revised Ruling

Based on the facts set out above, we rule that:

1. The RM is not required to pay GST on its purchases of gravel from XXXXX; and

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

Our original ruling is revoked and replaced with the above ruling, effective XXXXX.

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 our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

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." Absent any specific exclusion, the supply of gravel from XXXXX to the RM is a taxable supply with GST being exigible.

Subsection 162(2) of the ETA provides a specific exclusion in that a supply of a right to explore for or exploit a mineral deposit, ... or fishery resource is 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 the right, with the result that no GST is exigible. Subsection 162(3) contains an exception to subsection 162(2). Based on the facts, this exception does not apply to the supply of gravel from XXXXX to the RM.

Generally, where a person has paid an amount as or on account of tax, where the amount was not payable or remittable by the person, whether the amount was paid by mistake or otherwise, the person is entitled to a rebate of that amount pursuant to subsection 261(1) of the ETA. However, a rebate in respect of that amount shall not be paid to the person unless the person files an application for the rebate within two years after the day the amount was paid or remitted by the person pursuant to subsection 261(3) of the ETA.

To apply for the rebate, please complete and submit the attached GST189 General Application for Rebate of Goods and Services Tax (GST)/Harmonized Sales Tax (HST) application form. Careful attention should be paid to the time limit to apply for this rebate which is two years after the day the tax was paid or remitted by the person. If you require assistance in completing the application form, please contact XXXXX[.] Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9218.

Yours truly,

Kevin W. Smith
Goods Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate