GST/HST Technical Information Bulletin B-073
June 19, 1994

This bulletin does not replace the law found in the Excise Tax Act and its Regulations. It is provided for your reference. As it may not completely address your particular operation, you may wish to refer to the Act or appropriate Regulation, or contact any Revenue Canada Excise/GST district office for additional information. If you are located in the province of Québec, please contact the ministère du Revenu du Québec (MRQ) for additional information.

Introduction

This bulletin outlines the application of the Goods and Services Tax (GST) to supplies of freehold mineral titles by way of sale.

The sale of freehold mineral titles

For the purposes of this publication "sale" shall include sales, barters, exchanges, gifts or dispositions, provided the "sale" results in a transfer of the ownership of the property or a transfer of the possession of the property under an agreement to transfer ownership of the property.

Generally, when ownership of land is acquired, the person acquires ownership of the surface of the land as well as all the minerals that lie beneath the surface. The person supplying the land can, however, retain ownership of all or some of the minerals below the surface when the supply of the land is made. For most of the land in Canada, ownership of the minerals below the surface was retained by the Crown, either through statutes or through the original grant of the land. Therefore, the federal and provincial governments own most of the minerals in Canada.

In some situations, however, a person obtained ownership of the minerals as well as of the surface of the land. In some of these situations, the person has separated the ownership of the minerals below the surface from the ownership of the surface. This resulted in two "titles" being created _ one for the surface and another for the minerals under the surface. The "title" for the minerals below the surface is referred to as a "freehold mineral title".

In those cases where a person owns the minerals below the surface the person can make a supply of the freehold mineral title by way of sale. When such a supply is made, the vendor normally sells the complete bundle of rights the vendor holds in the minerals. This bundle of rights includes, but is not limited to:

(a) the right to use the minerals - the minerals can be recovered from the land or can be wasted;

(b) the right to alienate all or part of the freehold mineral title - the freehold mineral title can be sold or a portion of the mineral rights can be sold or leased out;

(c) the right to pledge the freehold mineral title for credit - the freehold mineral title can be mortgaged; and

(d) the right to protect the minerals from trespass and nuisance.

One of the components that may be included in the "right to use the minerals" is the right to explore for or exploit a mineral deposit. Therefore, a purchaser of a freehold mineral title, or a purchaser of land that includes the underlying minerals, may acquire the right to explore for or exploit a mineral deposit as one component in the transaction. This right may, however, be limited by provincial or municipal laws.

Subject to the restrictions in subsection 162(2) [now 162(3)] of the Excise Tax Act, the supply of the right to explore for or exploit a mineral deposit, if supplied by itself, would be deemed not to be a supply pursuant to subsection 162(1) [now 162(2)] of the Excise Tax Act. Where, however, the right to explore for or exploit a mineral deposit is one component in the bundle of rights, subsection 162(1) [now 162(2)] would not apply, since the provision only applies to supplies of those rights which are specifically listed therein. Subsection 162(1) [now 162(2)] will, therefore, not apply to a supply by way of sale of a freehold mineral title, or to a supply by way of sale of land that includes the underlying minerals.

Since the supply by way of sale of a freehold mineral title is a supply of real property, pursuant to the definition of "real property" in subsection 123(1) of the Excise Tax Act, the provisions in subsections 221(2) and 228(4) of the Excise Tax Act may apply to the sale.