31 August 2000 GST/HST Interpretation 24995 - Tax Status of Payment Received Under Land Withdrawal Agreement

Dear XXXXX

Thank you for your letter of January 14, 1999 (with attachments) to the XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a lump sum payment received by your company under an agreement to withdraw land from your XXXXX. Your request has been forwarded to our office for reply.

Our understanding of the case is as follows:

1. The government of XXXXX owns, and is responsible for, public lands in the province. The XXXXX government controls the natural resources on those lands, such as XXXXX and minerals (including oil and gas), by issuing specific natural resource rights. Pursuant to the XXXXX, the XXXXX government may issue XXXXX rights under a XXXXX[.]

2. XXXXX has signed a XXXXX with the government of XXXXX. The XXXXX gives XXXXX the right to enter a defined area of public XXXXX land to XXXXX and is negotiated on a long-term basis XXXXX.

3. Oil and gas companies are granted mineral rights by the government of XXXXX to explore for and exploit oil and gas resources. These mineral rights may be for lands included in or adjacent to XXXXX land.

4. To exercise its mineral rights, an oil and gas company may be required to enter and develop a portion of the lands under XXXXX. The oil and gas company asks XXXXX to withdraw these lands from the XXXXX.

5. XXXXX agrees to the request. The two companies sign a Land Withdrawal Agreement prepared by XXXXX (the Agreement). A blank copy of the Agreement has been provided.

6. The Agreement consists of nine sections and one schedule. Blank copies of the following letters have also been provided: a letter of consent to the land withdrawal; a letter for amendments to the lands withdrawn; and a XXXXX on the lands.

7. Section 1 of the Agreement states XXXXX[.] The oil and gas company is the Applicant.

8. The surface leases granted by the government of XXXXX are also called dispositions. A disposition is a surface lease granted by the government of XXXXX for surface activities on public lands, and is issued under the XXXXX. The types of surface lease that may be issued by the XXXXX government include a XXXXX for a wellsite, a XXXXX for an access route, XXXXX for a power line.

9. Schedule A of the Agreement allows the oil and gas company to indicate the specific lands being requested. The oil and gas company is required to provide information including the Application number, location, and size of the requested area.

10. The regulations under the XXXXX outline the requirements for an application for a surface disposition, and the rights and obligations of the holder of such dispositions. One requirement applies when the disposition applied for is a disposition relating to oil and gas activities, and any of the public lands requested are already subject to a XXXXX disposition under the XXXXX. This requirement applies to applications for a XXXXX. For such applications, the written consent of the XXXXX disposition holder to the issuing of the disposition must be included with the application.

11. XXXXX XXXXX XXXXX[.]

12. XXXXX[.]

13. XXXXX[.]

14. XXXXX[.]

15. XXXXX[.]

16. After the Agreement is signed, if the lands taken or used by the oil and gas company differ from the lands requested in the Agreement, an amendment letter is completed and a sketch detailing the change in land area is provided. The amendment letter is subject to and part of the Agreement.

17. XXXXX of the Agreement indicates that XXXXX will retain a portion of the compensation paid as administration charges if the disposition is canceled, withdrawn or frustrated in any manner prior to the oil and gas company's entry.

18. XXXXX of the Agreement states that if the oil and gas company desires to assign, set over, lease or sell or otherwise dispose of its interest in the lands, XXXXX has the right of first refusal, and may reincorporate the lands in the XXXXX.

19. XXXXX of the Agreement states XXXXX[.] If XXXXX exercises its right to purchase the XXXXX, the two companies consider the supply of XXXXX a separate transaction and GST is payable on this taxable supply.

20. A XXXXX Commitment letter is completed for any XXXXX from the disposition, when XXXXX exercises or waives its right to the XXXXX.

21. XXXXX issues an invoice to the oil and gas company for the amount payable under XXXXX of the Agreement. The oil and gas company pays the lump sum amount.

Interpretation Requested

Is the lump sum payment subject to GST/HST?

Interpretation Given

The oil and gas company requires XXXXX consent before it will be granted any dispositions in respect of its mineral rights on public lands under the XXXXX. The Agreement between XXXXX and the oil and gas company is XXXXX consent to the issuing of those dispositions. When XXXXX gives its consent, it relinquishes some of its rights under the XXXXX.

XXXXX has been given rights to certain public lands under the XXXXX, including XXXXX rights and surface rights. XXXXX is supplying some of these rights by consenting to withdraw the lands from its XXXXX. The oil and gas company is receiving the right to access and use certain lands, and the right to sell any XXXXX from those lands. XXXXX has supplied these rights to the oil and gas company. The compensation paid to XXXXX by the oil and gas company is consideration for this supply.

Once the oil and gas company has received XXXXX consent, the government of XXXXX adjusts its records to reflect the change in the lessee from XXXXX to the oil and gas company. The government of XXXXX issues the dispositions, but it is not making the supply to the oil and gas company. The government made a supply to XXXXX when the XXXXX was signed, and it made a supply to the oil and gas company when the mineral rights were granted. The issuing of the dispositions is an acknowledgment from the XXXXX government that XXXXX has made a supply to the oil and gas company, and that, as a result of that supply, the oil and gas company, rather than XXXXX is now responsible to the government for those public lands.

Under subsection 162(2) (Based on Bill C-24 (second reading May 10, 2000), which includes a proposed amendment to the Excise Tax Act that will renumber current subsections 162(1) and (2) as subsections 162(2) and (3) respectively, in order to add new subsection 162(1).) of the Excise Tax Act (ETA),

"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 related 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 the right."

If the lump-sum payment to XXXXX is for such a right then it is deemed not to be consideration and thus not subject to GST.

With the Agreement, XXXXX is making a supply to the oil and gas company of its rights under the XXXXX, with respect to the withdrawn lands. Those rights are the right to explore for and exploit a XXXXX resource, and the right of entry or user relating to that right. The compensation paid to XXXXX by the oil and gas company is consideration for this supply. Pursuant to 162(2) of the ETA, the supply of the right to explore for and exploit a XXXXX resource, and the supply of a right of entry or user relating to that right, shall be deemed not to be a supply and any consideration paid or due in respect of the right shall be deemed not to be consideration for the right. GST/HST will not apply to the lump-sum payment.

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/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

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

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8253.

Yours truly,

Jacqueline Russell
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate