27 July 1998 GST/HST Ruling HQR0001151 - Payment to School Under Agreement for Operation of Cafeteria

                                                                        GST/HST Rulings and Interpretations
  Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Avenue
Vanier, ON K1A 0L5

Dear XXXXX

Thank you for your letter of January 5, 1998 (with attachments), concerning the application of the Goods and Services Tax (GST) to the transaction described below.

Statement of Facts and Transaction

Our understanding of the facts, and the transaction is based on the Agreement provided between the XXXXX (referred to in the Agreement as "the Client") and XXXXX for operation of food services at XXXXX ("the School").

•   Under the terms of the Agreement, the Client agrees to appoint XXXXX to operate food services at the School.

•   The Agreement was signed on XXXXX, 19 XX, was effective XXXXX, 19 XX and continues in full force unless terminated as provided for in the Agreement. Either party has the right to terminate the agreement on thirty days written notice.

•   XXXXX agrees to manage and operate the food services operation including planning and preparation of meals; purchasing and maintaining inventories of food and other supplies; hiring, training and paying employees; routine housekeeping of food preparation and service areas.

•   The Client agrees to provide the premises and such items as: fixed and loose equipment and maintenance thereof; heat, light and power; maintenance, repair and painting of premises; and pest and rodent control services

•   The agreement sets out operating hours for the cafeteria.

•   The financial arrangements set out in Schedule A to the Agreement ("the Schedule") provide that XXXXX agrees to operate the cafeteria facility on a profit or loss basis and retain all revenues and pay costs as set out in the Schedule. The School is not responsible to reimburse XXXXX for any cafeteria operating losses.

•   The Schedule provides for an annual contribution by XXXXX to the School of $ XXXXX payable on XXXXX, prior to each contract year. This may be renegotiated to a mutually agreeable amount. It is our understanding based on sample of letters from XXXXX to the School principal that this arrangement has been altered such that XXXXX now pays a percentage of sales with a minimum guaranteed amount paid to the School at the beginning of each school year. An additional payment is made at the end of the school year if required based on actual results.

•   You have also confirmed that the School Board is a registered charity and has been designated as a school authority for GST purposes.

Ruling Requested

You have inquired as to the GST status of the annual payment made by XXXXX to the School.

Ruling Given

Based on the facts set out above, we rule that the payment by XXXXX to the XXXXX is exempt from GST.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to departmental interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.

Explanation

The above ruling applies only to the particular agreement which was submitted to us for review.

We offer the following explanation of the ruling to assist you in applying the provisions of the GST legislation to other arrangements which may be in place for other schools.

The status for GST purposes of a payment under an arrangement such as set out above depends on a number of factors.

The first is the nature of the contractual relationship between the parties to the agreement. It is the Department's position that the particular agreement reviewed in this case is for a supply of real property by way of licence by the School Board to XXXXX. XXXXX is allowed access to the school premises for the purposes of operating the cafeteria on its own account. The contribution referred to in the Schedule to the Agreement is consideration for this supply.

A supply of real property by way of licence by a public service body such as a school authority is normally subject to GST as such a supply is excluded from the general exemption for supplies of real property in section 25 of Part VI of Schedule V to the Excise Tax Act by virtue of paragraph (f) of this section. This exclusion, however, applies to supplies made under agreements entered into after September 14, 1992. Since the agreement provided was entered into in 19 xx, payments made by XXXXX pursuant to this agreement remain exempt from GST.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9212.

Yours truly,

Michael Warren
Real Property Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
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