21 August 2000 GST/HST Interpretation 8312/HQR0001918 - Compensation for Lands Withdrawn from a

Dear XXXXX

Thank you for your letter of September 24, 1998, (with attachments) to the XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to payments received as compensation for the withdrawal of lands from the XXXXX. Your request has been forwarded to our office for reply.

Our understanding of the facts 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 forests and minerals (including oil and gas), by issuing specific natural resource rights. Pursuant to the XXXXX, the XXXXX government may issue XXXXX rights under XXXXX[.]

2. XXXXX is responsible for all XXXXX of public lands under a XXXXX signed with the government of XXXXX. The XXXXX is a long-term agreement XXXXX that allows XXXXX to enter a defined area of public XXXXX lands to XXXXX[.]

3. The government of XXXXX grants mineral rights to allow for the exploration and exploitation of oil and gas reserves on public lands. These rights may be for lands within the area of XXXXX. The oil and gas company may require the use of these lands to conduct industrial activity, such as drilling and access to wellsites, in respect of its mineral rights. The oil and gas company requests XXXXX consent to conduct industrial activity on the lands under the XXXXX.

4. XXXXX and the oil and gas company (the Applicant) sign a XXXXX (the Agreement). A copy of the Agreement between XXXXX and XXXXX has been provided as an example. The preamble of the Agreement states that XXXXX[.] A Disposition is defined in XXXXX of the Agreement as XXXXX[.]

5. 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, a XXXXX for a power line.

6. XXXXX of the Agreement provide the details of the lands to be withdrawn from the XXXXX. XXXXX lists the Dispositions XXXXX, purpose and legal description, while XXXXX is a survey map of the lands being withdrawn. For the Agreement between XXXXX and XXXXX, XXXXX lists the types of dispositions requested as XXXXX for wellsites and XXXXX for access routes.

7. 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 surface lease disposition must be included with the application.

8. XXXXX of the Agreement states that "XXXXX"[.]

9. XXXXX of the Agreement states that XXXXX[.]

10. XXXXX of the Agreement states that if XXXXX of the Agreement allows for an adjustment to the compensation if there is any change in the lands taken or used by XXXXX.

11. XXXXX of the Agreement includes provisions for additional compensation for such occurrences as inconvenience, damage to equipment or roads, or damage from XXXXX fires, if those damages are caused by XXXXX activities on the lands.

12. XXXXX of the Agreement states that if so directed by the XXXXX will XXXXX on the withdrawn lands. XXXXX of the Agreement states that XXXXX will have the first right to the XXXXX. If XXXXX exercises that right, it will pay XXXXX for the supply of XXXXX under XXXXX of the Agreement.

13. XXXXX issues invoices to the oil and gas company for the compensation payable under the Agreement. The compensation payable is divided into four sections: Crown dues, XXXXX damages, assessment fee, and miscellaneous charges. Copies of the invoices sent to XXXXX, as well as additional invoices to other companies, have been provided. A separate invoice is prepared for each disposition, identified by XXXXX[.]

14. The Crown Dues section of the invoice is divided into Crown dues and XXXXX credit. The Crown dues are payable under XXXXX of the Agreement. The XXXXX credit corresponds to the Crown dues payable on any XXXXX that XXXXX purchases from XXXXX.

15. The XXXXX Damages section of the invoice calculates the amount due for each type of XXXXX area damaged. The amounts calculated as XXXXX damages are payable under XXXXX of the Agreement. In addition, the XXXXX Damages section includes a credit for XXXXX. This corresponds to the amount that XXXXX will pay for any XXXXX by XXXXX from the withdrawn lands if it exercises its right to purchase the XXXXX.

16. The Assessment Fee is an administration fee charged when the XXXXX damages are less than XXXXX; the amount charged is the difference between XXXXX and the XXXXX damages.

17. The Miscellaneous Charges section of the invoice corresponds to the additional compensation for damages outlined in XXXXX of the Agreement. There were no amounts charged under this section on the invoices provided.

Interpretation Requested

Is the compensation paid to XXXXX by the oil and gas company subject to GST?

Interpretation Given

The oil and gas company requires XXXXX consent before it is granted the 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.

The government of XXXXX issues the disposition to the oil and gas company once the oil and gas company has received XXXXX consent, and adjusts its records to reflect the change in the lessee from XXXXX to the oil and gas company. The government of XXXXX does issue 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 (Senate second reading June 28, 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 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 relating 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 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 compensation payment.

Under XXXXX of the Agreement, the oil and gas company may be required to XXXXX. XXXXX of the Agreement states that the oil and gas company will offer such XXXXX to XXXXX, and that XXXXX may accept and purchase the XXXXX or waive its interest in the XXXXX. If XXXXX accepts the XXXXX, it is a supply of tangible personal property from the oil and gas company to XXXXX, and would be subject to GST under subsection 165(1) of the ETA.

Subsection 221(1) of the ETA states that "Every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax under Division II payable by the recipient in respect of the supply."

The oil and gas company is making a taxable supply to XXXXX. Pursuant to subsection 221(1) of the ETA, the oil and gas company should charge XXXXX for the supply of XXXXX, and collect tax on that supply.

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
Technical Officer
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate