23 December 1996 GST/HST Interpretation 11665-4-1 - Share Transactions of a Company Incorporated Under

We are writing in reply to your letter of June 8, 1996 to the XXXXX Tax Services Office wherein you indicated that you are contemplating changing your incorporation from a company under XXXXX to a company under XXXXX and you requested a ruling pertaining to transactions that would be occurring following such a change in incorporation.

More specifically, you wished to obtain our opinion as to whether XXXXX (the Club) is correct in its assumption that as a XXXXX company, the Club bears no responsibility to collect GST on behalf of an existing member who is transferring his/her share to a new member. It is your understanding that it is the vendor (the transferring member) who is responsible to collect GST (if he/she is a registrant) whereas the role of the Club (within a XXXXX company structure) would be to keep the Club's records up to date as a result of the transfer of share ownership. We apologize for the delay in responding to your request.

Statement of Facts

Our understanding of the facts is as follows:

The Club is incorporated under XXXXX provides that a society incorporated under that Act shall not have a capital divided into shares and also provides that the interest of a member in a society is not transferable. Thus, if a member wants to dispose of his/her membership, he must return the membership to the Club for cancellation.

Subsequently, a new membership is issued by the Club to a new member.

Pursuant to the by-laws of the Club, a member who wants to retire is responsible for finding a new member and sponsoring that new member. In addition, the retiring member must also determine the amount of the membership fee payable by the new member to the Club.

Subsequent to receiving the membership fee from the new member, the Club then pays the retiring member the amount of this fee less XXXXX or pays XXXXX % of the fee, depending on the number of the membership.

The Club is contemplating changing its incorporation to one under XXXXX of that Act provides that the shares in such a company are transferable in the manner provided by the articles of the company.

XXXXX also provides that the company must keep a register of its members and where the company has share capital, the company must maintain in its register the number or nominal amount, the class of the shares held by each member, the amount paid on each shares, the particulars of the transfer by any member of his shares or other interest etc.

Ruling requested

Where the Club changes its incorporation to a company under XXXXX the Club bears no responsibility to collect and remit the GST on behalf of an existing member who transfers his/her share to a new member.

Ruling given

Ss. 221(1) of the Excise Tax Act (ETA) provides that every person who makes a taxable supply shall collect the tax under Division II payable by the recipient in respect of the supply.

It is the Department's position that where a member owns a share, which is fully transferable, in a Club incorporated under XXXXX and disposes of the share, the member is making a supply of the share for the purposes of the GST. As such, pursuant to ss. 221(1) of the ETA if the supply of the share is taxable, then it is the member making the supply as opposed to the Club who is liable to collect and remit the GST. Thus, we agree with you that the Club bears no responsibility to collect and remit the tax on behalf of an existing member who is selling his/her share to a new member.

Hence, where the shareholder is using the membership in the course of its commercial activities, the supply of the share by the shareholder will be deemed to be a supply of a membership and not a supply of a financial service pursuant to the provisions of section 140 of the ETA due to the fact that ownership of the shares was a condition of the person obtaining a membership in the Club which provides dining, recreational and sporting facilities. As the shareholder is making a taxable supply within the meaning of ss. 123(1) of the ETA, the GST is collectible on the supply of the share pursuant to ss. 221(1) of the ETA. Note that where the shareholder is a small supplier using the membership in the course of his/her commercial activities and the consideration for the taxable supply exceeds $30,000, the shareholder will have to register and will have to collect and remit the GST on such a supply.

Alternatively, where the shareholder is using the membership for his own personal enjoyment, the supply of the share will be deemed to be made otherwise than in the course of a commercial activity pursuant to the provisions of paragraph 141.1(1)(b) of the ETA and as a result, will not be subject to the GST.

It should be noted that if the shareholder returns his shares to the Club which in turn reissues them to a new member, the supply by the Club will also be subject to the tax. Thus, the Club will be liable to collect and remit the tax on the supply of the shares pursuant to the provisions of ss. 221(1) of the ETA.

This ruling is subject to the general limitations and qualifications outlined in GST Memoranda Series Section 1.4. We are bound by this ruling provided that none of the above issues are presently under audit, objection or appeal, that there are no relevant changes in the future to the Excise Tax Act, and provided that you have fully disclosed all necessary facts and transactions for which you requested a ruling.

If you require any further information concerning this matter, please contact me at (613) 952-0329.

Danielle Laflèche, C.A.
Senior Rulings Officer
Financial Institutions and Real Property Division
GST Rulings and Interpretations Directorate