TAX

The GST is proposed to be implemented on Jan 1, 1991, at the rate of 9% on the vast majority of goods and services consumed in Canada. It is to replace the present 13 1/2% federal sales tax that is imposed on a narrow bas e (manufactured goods, with many exceptions). The GST is designed to be paid by the ultimate con sumer or purchaser. It will be collected by businesses or vendors throughout the production and distribution chain. As agents of the federal government, businesses will collect tax on their sales, but will be entitled to an input credit for the tax paid on their purchases.

Significant complexity is added by providing for two categories of transaction s that will not attract GST. On tax-exempt sales, no GST is payable, but a claim for input credits in respect of GST paid on related purchases will not be avail able. On tax-free or zero-rated sales, no GST is payable, but vendors will still be able to claim input tax credits in respect of GST paid on purchases used to produce the tax- free goods or services. Effect on Prospectors

So what does all this have to do with a prospector?

A prospector is businessman. His business is searching for and acquiring interests in mineral prospects. He may then vend a prospect into a juni or exploration company, farm it out to a financing company, or sell it outright. A prospector, as a consumer of goods and services, will have to pay the 9% GST on all his tax able purchases. These will include, for example:

equipment purchases,

supplies (other than basic groceries’),

rental of equipment,

transportation costs,

any payments to independent contractors (e.g. for line cutting, staking), but not wages to employees,

purchase of geophysical, geochemical services or reports.

Where these goods and services are purchased from unregistered small traders (persons with annual revenues of less than $30,000), GST will not be ch arged by t he supplier — these sales are tax-exempt.’ However, since the supplier will pa y GST on his inputs, his prices will likely increase accordingly. A likely resul t is that costs such as those listed above will increase after 1990, by some amo unt between 2 1/4% (the government’s estimate of the general inflationary effec t) and the 9% tax rate.

However, if the prospector purchases rights to explore for, or exploit, a natural resource, there will be no GST payable on the purchase. The Tec hnical Paper indicates that such rights will be essentially treated as tax-free supply. Simil arly in the following cases where a prospector disposes of exploration or mining rights, no GST has to be collected from the purchaser:

sold to a junior exploration company for shares,

farmed out (with a retained working interest or retained royalty interest) to a financing company, or

outright sale for cash.

Finally the Technical Paper indicates that the recipient of royalty income from a mining property will not be subject to GST. The taxable transact ion will be the domestic sale of production from the mine.

So does the implementation of GST mean that prospecting costs will go up by the 9% tax? Not necessarily. Provided the prospector is in fact carryin g on a comm ercial activity (and not just a hobby), the Technical Paper indicates he will be permitted to register and claim input tax credits. That is, if the prospector registers as a vendor, keeps track of GST paid that relates to the prospecting ac tivities, and files for refunds, he will be able to recover the GST paid. (Note that the Technical Paper indicates that refunds for purchases in excess of $30 w ill have to be supported by invoices showing the vendor’s registration number, a s well as the total amount of GST charged.) In this case the cost of GST will be the administrative costs plus the financing costs between time of payment to suppliers and refund from the government. The prospector will have to w eigh the ad ministrative costs of choosing to be part of the system against the GST cash ref unds, not otherwise available to him. There will be no relief for the GST buried in the prices charged by unregistered small traders in either case.

The prospector will face increased costs under the proposed GST regime. Since the value of his receipts by way of cash sales, share consideration, royalty inc ome or production income will not vary because of GST, his or her business risks will be increased.

Barry Dent and John Playfair are Tax Partners with Clarkson Gordon/ Ernst & Yo ung.

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