Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 143128
August 29, 2013
Dear [Client]:
Subject: GST/HST INTERPRETATION
Mineral claim tenures option agreement
Thank you for your facsimiles of March 6, 2012 and April 24, 2013, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to mineral tenure option agreements.
[...].
The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island (effective April 1, 2013) and 15% in Nova Scotia. The GST applies in the rest of Canada at the rate of 5%.
Effective April 1, 2013, the 12% HST in British Columbia has been replaced by the 5% GST and a provincial sales tax.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand the facts to be as follows:
1. Mineral claim tenures are rights granted by the government of British Columbia to explore for or exploit minerals.
2. [...] (the Optionor) owns mineral claim tenures (the Tenures) that are held in its name and have been managed by it since they were staked.
3. There are not yet any mineral deposits, resources, or estimated reserves proven in respect of the Tenures.
4. The Optionor may enter into agreements (the Agreement, a generic example of which was provided to us) with purchasers (the Optionee), whereby the Optionee is able to earn a [...]% right to Tenures subject to a [...]% Net Smelter Return(NSR) royalty payable to the Optionor by meeting the terms/work requirements as is outlined in the Agreement, paying fixed amounts over [...] years, supplying common shares in the Optionee to the Optionor (in some cases), and paying to the Optionor, or on behalf of the Optionor, all payments and assessments required to keep the Tenures in good standing.
5. Not all actual agreements entered into between the Optionor and an Optionee require the issuing of shares by the Optionee.
6. The Optionee has the right to purchase a [...]% NSR at any time upon payment of a pre-determined sum.
7. The Optionee assumes all the costs for maintaining the Tenures by doing the exploration/development work, and filing notice of the required work with the appropriate authorities over the term of the Agreement. The Optionee is deemed to be the operator of the Tenures over the term of the Agreement.
8. Upon meeting all the terms of the Agreement, the Optionor will transfer title to the Tenures to the Optionee. If the Optionee does not meet the terms of the Agreement, then the Agreement is terminated and the Optionee forfeits any and all interest in the Tenures.
9. Although not reflected in the Agreement, you have indicated that the Optionee may return anything less than [...]% of the Tenures during the option period, provided that the Tenures are in good standing for a [...]-year period. The Optionee may also return all the Tenures during the [...] year of the Agreement, provided that the Tenures are in good standing for a [...]-year period.
Interpretation Requested
You would like to know whether GST/HST is collectible on the supply of a Tenure made under the Agreement.
Interpretation Given
Based on the information provided, GST/HST would not be collectible on the supply of a Tenure made under the Agreement.
Pursuant to subsection 162(2), the following supplies are deemed not to be supplies 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:
• a right to explore for or exploit a mineral deposit, a peat bog or deposit of peat or a forestry, water or fishery resource,
• a right of entry or user relating to a right referred to above,
• 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, or
• a right to enter or use land to generate or evaluate the feasibility of generating electricity from sun or wind.
As a result, no GST/HST is payable with respect to the supplies indicated above, subject to certain exceptions when the right is provided to a consumer or a non-registrant who acquires the right in the course of a business of making supplies of certain products, minerals, peat or electricity to consumers. There are also special rules found in subsection 162(4) for determining the application of the GST/HST to certain transactions under farm-out agreements.
Generally, where property or services are given as consideration in exchange for other property or services, the value of the consideration for one is the fair market value of the other. Special rules are in place in subsection 162(4) to eliminate the requirement to establish a value for certain property or services exchanged between a farmor and a farmee in a farm-out agreement that is entered into for the purpose of the exploration and potential development of real property for mineral deposits.
Where a farmor enters into an agreement in writing with a farmee to transfer particular natural resource rights, or portions of them, relating to unproven property to the farmee in consideration or part consideration for the farmee undertaking the exploration of the property for mineral deposits, providing information (or the right to it) gathered from the exploration, and developing the property for the production of minerals, the value of the consideration of any property or service given by the farmor to the farmee under the agreement is deemed to be nil under paragraph 162(4)(a) to the extent that the property or service is given as consideration for any of the following (each of which is referred to as the farmee's contribution):
• the undertaking of that exploration or development;
• the provision of that information (or the right to it); and
• any transfer under the agreement by the farmee to the farmor of any interest in specified mining or well-site equipment that is used by the farmee exclusively in that exploration or development.
If a portion of the consideration given by the farmor to the farmee is monetary, tax on the farmee's contribution is calculated on that consideration.
Similarly, by virtue of paragraph 162(4)(b), the farmee's contribution need not be valued for purposes of determining any tax on the property or services given by the farmor. This is achieved by deeming the value of the farmee's contribution as consideration for any property or service given by the farmor to the farmee under the agreement to be nil.
However, if part of the consideration given by the farmor for the farmee's contribution is a service or property (each of which is referred to as the farmor's additional contribution) that is not a natural resource right in respect of unproven property:
• the farmee is deemed to have supplied a separate taxable service to the farmor and this separate service is deemed to be consideration for the farmor's additional contribution; and
• the value of the farmee's service is deemed to be equal to the fair market value of the farmor's additional contribution.
Where the farmor's additional contribution is a taxable supply and the farmor is a GST/HST registrant, the farmor is required to charge tax calculated on the fair market value of the additional contribution at the time of transfer. The farmee is required to collect tax on that same value.
The consideration for the farmor's additional contribution and the consideration for the service deemed to have been supplied by the farmee are deemed to become due at the time of the transfer. The time of the transfer is:
• if the farmor's additional contribution is a service, when the performance of the service commences, and
• in any other case, when ownership of the farmor's additional contribution is transferred to the farmee.
For example, under an agreement in writing, a GST/HST registered farmor transfers ownership of equipment to a farmee and supplies natural resource rights in an unproven property in return for which the farmee undertakes the exploration of a mineral deposit. The farmor must charge the farmee tax on the fair market value of the equipment. The tax becomes collectible at the time ownership of the equipment is transferred to the farmee. The farmee, in return, is deemed to have made a separate taxable supply of a service to the farmor and the farmee must charge the farmor an equivalent amount of tax in respect of the deemed supply.
If the farmee also supplies a property or service other than the farmee's contribution in return for the farmor's additional contribution, the tax that the farmee must charge the farmor on that other property or service is calculated on the amount, if any, by which its value exceeds the fair market value of the farmor's additional contribution. This reflects the fact that the farmee is already required to charge the farmor tax calculated on the fair market value of the farmor's additional contribution.
For example, under an agreement in writing, a GST/HST registered farmor supplies natural resource rights in an unproven property and transfers equipment with a fair market value of $8,000 to a farmee in return for the exploration and development of the unproven property, and a processing service to be provided by the farmee. The usual charge for the processing service performed by the farmee is $10,000. The farmor must charge the farmee tax calculated on the value of the equipment that the farmor is supplying to farmee (i.e., $8,000). In turn, the farmee is deemed to have supplied a service to the farmor for the same value of consideration that was paid for the equipment and must charge tax to the farmor, which is calculated on $8,000. The farmee must also charge the farmor tax on the processing service actually supplied.
However, the tax on the processing service is only calculated on $2,000 (the amount by which the value of the service exceeds the value of the equipment). Therefore, the farmee must charge tax on the total amount of $10,000 (the fair market value of the processing service).
Consequently, with respect to the ancillary supplies of property and services between the farmor and the farmee, each party is required to charge tax on the fair market value of the supply that they made and to pay tax on the fair market value of the supply that they received in return.
Tenures may exist as a freehold title, a Crown granted mineral claim, or most commonly, a mineral or placer title. Mineral and placer titles can take the form of either a claim or a lease. The main difference between a claim and a lease is the quantity of ore that can be extracted annually. Tenure claims are maintained in good standing either by working a site or making payments to the government in lieu of work.
When applying the rules in section 162 to the Agreement in this case, the results are as follows.
The Agreement states [...]. In this case, the Optionor "options" Tenures to other parties, the Optionees. [...] to the Agreement states that "[...]". The right to explore is a right that comes within section 162.
Section [...] of the Agreement states more explicitly that "[...]." [...].
Section [...] requires the Optionee to pay a fixed amount upon signing, plus once per annum for [...] years. The Optionee is also required to expend a certain amount annually in exploration or development expenditures, issue common shares of the Optionee to [...][the Optionor] in certain amounts and on certain dates, and assume all the costs for maintaining the Tenures by doing and filing notice of the required work over the term of the Agreement. You stated that in some cases, the consideration is monetary and no shares are issued. Presumably, the work commitments are always included in a particular agreement.
If the conditions are met, at the end of the [...] year period, the Optionor transfers title to the Tenure to the Optionee. In particular, section [...] states that "[...]".
One issue that arises is whether the Optionor is making a single supply of a right described in section 162, a supply of an opportunity (i.e., the Option) to acquire such a right, or a combination of both. Strictly speaking, an option to acquire something is not necessarily the same as acquiring the thing itself and an option to acquire something is generally considered to be a supply. However, in this case, we do not consider the Optionor to be making a separate supply of the option. As long as the Optionee meets its obligations, it will automatically acquire the Tenure. It will be deemed to have exercised the Option, and no further consideration is paid. The nature of the Agreement is similar to a conditional sales contract for the sale of a good, whereby title to the good passes automatically upon full payment of the consideration.
Therefore, the Optionor is considered to be providing natural resource rights in respect of an unproven property to the Optionee. This is a supply to which paragraph 162(2)(a) applies; therefore, the supply is deemed not to be a supply. As a result, the Optionor is not required to collect GST/HST in respect of the rights provided under the Agreement and the Optionee is not required to pay any GST/HST in respect of the monetary amounts payable under the Agreement as these amounts are deemed not to be consideration for the rights. In addition to the monetary amounts, the Optionee agrees to undertake exploration/development work in exchange for the natural resource rights and, in some cases, supply shares to the Optionor. The supply of the work is a service and thus is a supply by the Optionee to the Optionor. Since this work is partial consideration for the natural resource rights, it comes within paragraph 162(4)(b) and is deemed to have a nil value. Therefore no tax is exigible on the supply of the work.
Where the Optionee issues shares (a supply) to the Optionor, this supply is not addressed in subsection 162(4). Paragraph 162(4)(b) provides that the value of the "farmee's contribution" is deemed to be nil; however, "farmee's contribution" is described in subparagraphs 162(4)(a)(i), (ii) and (iii) as the undertaking of exploration or development, the provision of, or right to, information relating to the exploration or development, and any transfer of any interest in specified mining or well-site equipment used exclusively in the exploration or development. Thus, the issuance of shares does not come within the meaning of "farmee's contribution".
Shares are a financial instrument as defined in subsection 123(1). The issue of a financial instrument is a financial service as defined in subsection 123(1). A supply of a financial service is in many cases an exempt supply. Thus, the issuance of shares by the Optionee would be an exempt supply and the Optionee would not be required to collect tax.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-957-8253. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Gunar Ozols
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
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