26 May 2000 GST/HST Interpretation 25471 - Application of Section 167 on the Acquisition and Disposition of

XXXXX

This is in reply to your letter of December 1, 1999, requesting an interpretation on the application of section 167 of the Excise Tax Act (ETA) to the acquisition and XXXXX[.] The XXXXX is preparing a standard document, the XXXXX XXXXX[.] The XXXXX document is structured to be used for all acquisitions and dispositions XXXXX and includes a clause outlining the alternative methods of handling GST/HST on such transactions. The first method proposes accounting for GST/HST on the supply XXXXX properties in the ordinary manner: generally, the purchaser will pay the tax on the transaction to the vendor, who will report and remit it.

The second method proposes that the vendor and purchaser make a joint election under section 167 of the ETA so that GST/HST will not be payable on the transfer of the assets. Subsection 167(1) of the ETA allows the vendor and purchaser to make a joint election to have subsection 167(1.1) apply to the sale of a business or part of a business. Subsection 167(1.1) states that no tax will be payable on the supply of the business or part of a business, with certain exceptions. Subsection 167(1) outlines the criteria that must be met to be eligible to use the election.

XXXXX has requested clarification from your office on when the second method may be used, as many companies are applying the election to asset sales when it is not clear that a business or part of a business is being sold. In reference to this request, you requested an opinion from the XXXXX[.] They explained that guidelines for when a supply meets the criteria of subsection 167(1) are outlined in Policy Statement P-188, "Supply of a Business or Part of a Business for the Purpose of the Election Under Subsection 167(1)" and, since joint ventures are a common business arrangement in the XXXXX[,] Policy Statement P-103R, "Transfer of an Undivided Interest in a Joint Venture" may also be relevant.

You have requested further clarification from us as to how these policies, along with Policy Statement P-128R, "Tax Treatment of a Supply of an Undivided Working Interest in the Assets of a Mine or an Oil and Gas Well," would be applied to the supply of a working interest XXXXX so as to determine when the transactions contemplated by the XXXXX document would be eligible for the subsection 167(1) election.

A working interest is the right to explore for, produce and own a mineral XXXXX XXXXX and all real and tangible personal property, bought or built, in order to explore for or exploit that mineral deposit. The sale of a working interest is normally regarded as the sale of an undivided interest in the assets of an XXXXX XXXXX[.] This sale can involve the supply of tangible personal property, real property and the right to explore for or exploit a mineral deposit. Pursuant to subsections 165(1) and 165(2) of the ETA, the supply of tangible personal property and the supply of the real property are taxable at 7% (15% for the harmonized provinces). Pursuant to section 162 of the ETA, the supply of the right to explore for or exploit a mineral deposit would generally be deemed not to be a supply and no GST/HST would be payable in respect of this supply.

When the working interest is considered a business or part of a business, the election under subsection 167(1) may be available. To be eligible to use this election, the following two conditions must be met:

1. The supplier must supply a business or part of a business that is established or carried on, and

2. Under the agreement for the supply, the recipient must acquire ownership, possession or use of all or substantially all of the property that can be reasonably regarded as necessary for the recipient to be capable of carrying on the business or part as a business.

Whether the supply of XXXXX will meet these criteria will be a question of fact that must be determined on a case-by-case basis. Policy Statement P-188, "Supply of a Business or Part of a Business for the Purpose of the Election Under Subsection 167(1)" offers guidelines for determining whether a supply meets the criteria for the election.

A general statement cannot be made to the industry on whether this election applies to every transfer of an interest in XXXXX [t]he XXXXX document will be a standard document used in all acquisition and disposition transactions in the XXXXX including purchase and sale agreements, and asset exchanges. The transactions could involve many different scenarios, and it is not possible to definitely state that the subsection 167(1) election will be available in all cases. The criteria for the subsection 167(1) election will have to be applied to each case, and where the transaction meets the criteria, the election may be used.

The supply of an interest operating under a joint venture does not necessarily qualify for the election under subsection 167(1). The supply of an interest in XXXXX XXXXX operating under a joint venture would still have to meet the criteria outlined in subsection 167(1). Policy Statement P-103R, "Transfer of an Undivided Interest in a Joint Venture," outlines when the supply of an undivided interest in a joint venture may meet these criteria. In all cases, including circumstances involving the supply of an interest operating under a joint venture, the supplier must supply a business or part of a business that is established or carried on; and under the agreement for the supply, the recipient must acquire ownership, possession or use of all or substantially all of the property that can be reasonably regarded as necessary for the recipient to be capable of carrying on the business or part as a business. Whether the supply of an undivided interest in XXXXX XXXXX under a joint venture will meet these criteria will be a question of fact that must be determined on a case-by-case basis.

Policy Statement P-128R, "Tax Treatment of a Supply of an Undivided Working Interest in the Assets of a Mine or an Oil and Gas Well," outlines the general tax treatment of each asset where the supply does not meet the conditions of the subsection 167(1) election, or where the vendor and purchaser choose not to make the election. This would correspond to using the first method proposed for GST/HST accounting in the XXXXX document, which would be applied when the election under subsection 167(1) cannot or will not be made.

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