GST/HST POLICY STATEMENT

P-105R TAX STATUS OF A NATURAL RESOURCE LEASE PAYMENT "EXPENSE"

DATE OF ISSUE

SUBJECT

LEGISLATIVE REFERENCE(S)

NATIONAL CODING SYSTEM FILE NUMBER(S)

EFFECTIVE DATE

TEXT

The lessee of a resource property ("lessee") enters into an agreement with a drilling and well servicing contractor to have the contractor drill and complete a well on the resource site.

The agreement states that while the services are being performed, the contractor "agrees to pay all taxes, assessments, fees and charges levied or assessed on Contractor in connection with or incidental to the performance of the Agreement". In addition, the agreement may state that the lease payment is to be provided by the contractor at the expense of the lessee and that neither the contractor nor anyone employed by the contractor shall be deemed for any purpose to be an agent of the lessee in the performance of the work.

Once the agreement is completed, even though the lessee does not assign the lease for the property to the contractor, the contractor will be billed directly by the lessor of the property for the lease payment for the resource property. The contractor will then be reimbursed by the lessee for the expenses incurred in making the supply of the service of drilling and completing the well, including the lease payment.

The lease payment is consideration for a supply of the right to explore for or exploit a mineral deposit and the supply is deemed not to be a supply and any consideration paid or due, in respect of such a right is deemed not to be consideration for the right pursuant to subsection 162(1) of the Act. Therefore, no tax is payable on the lease payment made to the lessor.

The issue to be resolved is the tax status of the reimbursement for the lease payment by the lessee to the contractor.

It is the Department's position that the reimbursement by the lessee to the contractor for the lease payment expense incurred while supplying the service of drilling and completing a well is part of the payment for the taxable supply of the service, unless an agency relationship exists. If an agency relationship exists, then the reimbursement is not part of the payment for the supply, or for any other supply, and is therefore not subject to tax.

An agency relationship will be considered to exist, even though the agreement between the parties specifically states that neither the contractor nor anyone employed by the contractor shall be deemed for any purpose to be an agent of the lessee in the performance of the work, where the facts support the existence of an agency relationship. The facts would be considered to support the existence of an agency relationship where, for example, the lessee is legally liable for the lease payment and has expressly or implicitly authorized the contractor to make the lease payment on the lessee's behalf.

For additional information about the Department's position concerning the meaning of "agent" and "agency" for GST/HST purposes, please refer to Policy Number P-182, Determining the Meaning of the Terms "Agent" and "Agency" as used in the Relevant Sections of the Excise Tax Act and Identifying Those Factors that may be used to Determine the Likelihood of Agency.