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XXXXX
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GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 9th Floor
25 McArthur Road
Ottawa ON K1A 0L5Case: HQR0000990
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Dear XXXXX
This is in reply to your request of September 23, 1997 which was forwarded to this Directorate by the XXXXX[.] Tax Services Office, and our telephone conversations in May 1998, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the cost sharing arrangements entered into between XXXXX[.]
Based on the information provided, our understanding of the facts is as follows.
1. XXXXX is a registrant for purposes of the Excise Tax Act (the "ETA") and the Business Number assigned to it is XXXXX[.]
2. Since 19 xx, XXXXX and XXXXX have each contracted with XXXXX and invoiced each other for shared student transportation routes. Each school board managed its own bus operator costs and transportation routes.
3. Subsequently, XXXXX began to jointly manage student transportation services under a cost-sharing arrangement.
4. Prior to XXXXX 19 xx, each of the three Boards invoiced the other for their proportionate share of student transportation costs. The proration was based on the other Board's students over the total number of students on the route, multiplied by the cost of that route. The Ministry of Education XXXXX required these "chargebacks" to be reported as revenue and defined as "Transportation Recoveries" as the chargebacks were considered in the funding by the provincial government of that Board's transportation costs. The boards did not charge each other GST, nor did the boards self-assess GST or claim GST rebates for these chargebacks.
5. In 19 xx, a cost-sharing agreement was prepared by the three boards. This tri-board agreement provided for a common administration of student transportation services as well as sharing in the cost of administration and overhead expenses. This agreement was signed by XXXXX in XXXXX 19 xx. XXXXX signed the agreement in XXXXX 19 xx.
6. Pursuant to the tri-board agreement, the cost-sharing pool on which the chargebacks are based includes student transportation services and administration and overhead costs which consist of:
a) office supplies and furniture;
b) computer hardware and software support for transportation;
c) staff salaries and benefits;
d) staff training and professional development;
e) safety programs; and
f) miscellaneous expenses.
7. According to the tri-board agreement, the cost-sharing is prorated and calculated using the following sharing formulas:
a) For administration and overhead costs: The percentages are calculated according to each Board's share of the total number of students transported for the previous year. The initial sharing formula was:
• XXXXX
XXXXX
XXXXX
b) For operational costs: The operating costs for each route is allocated to each Board based on its average students on the routes as a percentage of total number of average students on the route.
8[.] XXXXX purchased new transportation software in 19 xx. The cost of XXXXX was allocated according to the formulas in the tri-board agreement.
9. There was an allocation charge for administrative and overhead costs for the XXXXX school year. The costs of XXXXX staff from XXXXX were pooled with XXXXX cost centre administration expenses and the total costs allocated based on the formulas in the tri-board agreement.
10. As of XXXXX contracts for and pays for most of the expenses, including student transportation services. It then it recovers a portion of these expenses from the other two school boards.
11. XXXXX had its own bus operator contract for the XXXXX school year. XXXXX had a joint bus operator contract for the XXXXX school year.
12. XXXXX does not have binding authority to enter into third party contracts on behalf of the other school boards. However, pursuant to their agreement, it does have the ability to make purchases for all three parties without consulting the other two.
13. Although the tri-board agreement provides for the cost-sharing of administration and overhead costs, the chargebacks by XXXXX for the XXXXX school year included only bus operator costs which were charged to the other Boards on a pre-GST basis. On some occasions, XXXXX calculated the GST, on other occasions the other Boards self-assessed the GST and sent a payment that included the GST to XXXXX. The other Boards claimed a GST rebate for the GST they paid to XXXXX[.]
14. In XXXXX stopped invoicing the other Boards and starting allocating the bus operator expense to the other school boards for their proportionate share of the use of the transportation service by means of journal entries.
15. As of XXXXX had only charged the other Boards for the bus operator expense. The other two Boards still use the XXXXX buses.
16. XXXXX has been claiming a school authority rebate based on an amount that is net of the portions it allocated back to the other Boards. That is, it has reduced its "GST Paid" account by the GST it allocated to the other school boards and has claimed a rebate on the difference.
You identified several issues in your analysis of this case concerning the existence of an agency relationship, the "direct cost" exemption in section 6 of Part VI of Schedule V to the ETA, the tax status of reimbursements, and the documentary requirements for claiming a tax rebate. This letter will provide comments on the following issues:
a) cost sharing arrangements;
b) principal and agent relationship;
c) cost allocations for administrative and overhead expenses;
d) cost allocations for student transportation services;
e) the "direct cost" exemption provided in section 6 of Part VI of Schedule V to the ETA with respect to the resupply of the student transportation services by the XXXXX before XXXXX and after XXXXX and
f) the documentary requirements to support rebate claims.
a) Cost sharing arrangements
Under a typical cost-sharing arrangement, the parties do not carry on a business together with a view to profit as in a partnership; rather they share expenses. Certain expenses or operating costs, such as rent, employee wages, and utilities, are typically shared. The allocation of joint costs under a cost-sharing arrangement may result in the imposition of the GST/HST when one party is reimbursed by another. The tax status of the various supplies under a cost-sharing arrangement depends on whether or not there is a principal and agent relationship among the parties. Where there is no such relationship, there is generally a "resupply" by one party to the others.
One basic difference between a partnership and a cost-sharing arrangement is that a partnership is an entity recognized in law. Furthermore, as noted above, generally a partnership is the relationship between two or more persons carrying on business in common with a view to profit. Finally, operation of the partnership, and the rights and obligations of the partners, are determined by provincial statute or the partnership agreement. The Department will determine the existence of a partnership using the same criteria as that are used under the Income Tax Act, as outlined in Interpretation Bulletin IT-90, What is a Partnership?
If, with respect to any particular purchase, it is established that a principal and agency relationship does not exist between XXXXX the agreement between those school boards and the third party from whom the purchase is made should be examined to determine who is the recipient of the supply. It may be that in certain situations, all three school boards are parties to an agreement for the purchase and all three are recipients. In this case, each would be considered to have paid GST on their respective portion of the purchase, notwithstanding that one makes the actual payment. That is, if all three are liable, then each will be entitled to claim rebates in proportion to their acquisition of the property or service.
However, if XXXXX alone enters into the agreement for the purchase, so that it alone is liable, then it alone is the recipient (i.e., the person who is liable to pay the consideration for the supply) of the initial supply from the third party. As the recipient of the supply, XXXXX will incur the liability for any GST on the purchases, and will be entitled to recover the GST it paid through a rebate or input tax credit, depending on how the purchase is used. Any allocations to the other school boards in respect of apportioning usage would be a separate resupply of the property or service in question, even if the resupply is in accordance with a cost-sharing arrangement. The tax status of that resupply will depend on the nature of the property or service being resupplied and whether there are provisions in the ETA to exempt the supply.
b) Principal and agent relationship
The legal principle of agency recognizes that an agent may act in the capacity of the principal. If a principal and agent relationship exists and a particular property or service has been acquired by a person in the person's capacity of an agent, then there is no resupply in respect of this transaction by the agent to the principal. The agency principle may be applicable in this context in a cost-sharing arrangement.
With respect to the issue of whether XXXXX is acting as an agent on behalf of XXXXX for the purchases of transportation and administrative services, please note that the Department does not rule on whether an agency relationship exists where the relationship in question is already established or ongoing. It is the Department's position that whether an agency relationship exists between two or more persons will depend on the relevant facts of the situation and the principles of law. Moreover, the fact that a person may act as an agent for some matters does not necessarily mean that the person is acting as an agent in all matters.
The characteristics associated with a principal and agent relationship are described in the enclosed Policy Paper P-182, Determining the meaning of the terms "Agent" and "Agency" (Draft). For instance, in a principal and agent relationship, an agent is normally able to represent the principal and enter into contracts on the principal's behalf or otherwise legally obligate the principal. Any transactions undertaken by the person in the capacity as "agent" will be clearly done under the authorization of its principal. It is our understanding that XXXXX does not have binding authority to enter into third party contracts on behalf of XXXXX[.]
Furthermore, an agent acts under the authority granted by the principal. The agent has a duty to account to the principal for the agent's actions and is bound by the instructions of the principal. Thus, in a relationship of agency, it should be clear that the principal has a degree of power over the actions of the agent; the agent would be acting as an extension of the principal and, therefore, would be under the principal's general direction and control. This is sometimes evidenced by requiring the principal's approval for certain expenditures or simply by requiring ongoing reports by the agent to the principal.
While we cannot rule on whether an agency relationship exists, the facts of this case are not generally indicative of a principal and agent relationship with respect to the bus operator costs. Consequently, we agree with your conclusion that XXXXX is not acting as an agent of XXXXX for the supplies involving student transportation services.
c) Administrative and overhead expenses
The application of the GST to charges for administrative and overhead costs supplied by XXXXX and the reimbursement by the other school boards will depend on whether XXXXX is acting as the agent of the other school boards in respect of a particular supply. As noted above in the commentary concerning cost-sharing arrangements, where there is no principal and agent relationship between the parties to the cost-sharing arrangement and where just one party (e.g., the XXXXX has entered an agreement for a purchase, that party would be the recipient of a particular supply and would then be making a separate resupply to the other parties. If the resupply of the service is taxable (i.e., no exempting provision applies), then the first party (i.e., the recipient of the supply) must charge the GST on the resupply to the other parties.
Thus, where XXXXX is not acting as an agent and incurs overhead and administrative costs on its own account and then resupplies these services to the other school boards party to the cost-sharing arrangement, such supplies would be taxable, and XXXXX would be required to charge the GST on these supplies. Furthermore, as a registrant, the XXXXX would be entitled to input tax credits for the GST it paid on purchases related to the supply of taxable administrative services.
With respect to salaries, services that are provided by employees to their employers are not subject to GST, and so costs related to salaries will have no tax consequences under the GST. However, if one school board provides the services of its employees to another school board, this will be a taxable supply of administrative services.
It is unlikely that the "direct cost" exemption in section 6 of Part VI of Schedule V of the ETA would apply to resupplies of administrative and overhead costs. This provision does not apply to supplies of intangible personal property, such as computer software. Also, in order for section 6 to apply to a service, the service must have been purchased by the body for the purpose of resupplying it. Thus, if XXXXX were to provide administrative services to the other school boards through the use of its own employees, such supplies would not be exempt under the "direct cost" provision.
d) Student transportation services
It is our understanding that XXXXX has incurred the expense and liability for the acquisition of the transportation services from the bus operator, and then charged a portion of the cost of this acquisition to XXXXX[.] As there are no indicators of a principal and agent relationship in the facts provided, it appears that XXXXX was the sole recipient of the transportation services from the bus operator. As the lone recipient of the supply, the XXXXX had incurred the liability for the GST on the purchase in the course of its exempt activity of transporting students.
The allocations of bus operator costs by XXXXX to the other school boards in respect of apportioning usage were resupplies of the transportation service. These resupplies are taxable unless an exempting provision, i.e., the "direct cost" exemption in section 6 of Part VI of Schedule V to the ETA, applies. Where the resupplies were taxable XXXXX was entitled to input tax credits in relation to the portion of the acquisition that it used to make a taxable resupply. XXXXX was entitled to a rebate for the remainder of the GST it paid on this acquisition. Where the resupplies were exempt, XXXXX was entitled to a rebate in respect of the acquisition.
e) "Direct cost" exemption
In applying the "direct cost" exemption provided in section 6 of Part VI of Schedule V to the ETA, please note that when the transportation service was resupplied by the XXXXX to the other school boards party to the cost-sharing arrangement, the direct cost of the resupply may be determined proportionally.
"Direct cost" exemption prior to 1997
With respect to the resupplies of transportation services made by XXXXX prior to 1997, the direct cost would be the value of the consideration originally paid by XXXXX when it acquired the service from the bus operator, including tax that the Board could not recover as an input tax credit or rebate. XXXXX did not charge any extra amount and up until September 1996, did not charge GST to the other boards. Provided that the consideration charged by XXXXX for the resupply of the student transportation services was based on the direct cost of the bus operator cost and did not include an amount of tax recoverable by way of a rebate or input tax credit, the resupply was exempt pursuant to the previous wording of section 6 of Part VI of Schedule V. That is, where the transportation services were supplied by the XXXXX in the course of a business of making supplies of those services, and where the value of the consideration paid by the recipient was equal to the usual charge and did not exceed the direct cost of the transportation services, GST would not have been due on the resupply of the transportation services by XXXXX prior to 1997.
With respect to the rebate that XXXXX is entitled to claim for the bus operator costs, if this expense was incurred in the course of an exempt activity, i.e., to transport students to and from school, and the resupply of the transportation service to the other school boards was exempt, XXXXX would be entitled to a rebate for school authorities based on the full amount of GST paid or payable to the bus operator. For example, if the Board paid XXXXX plus XXXXX GST, it would be entitled to a rebate of 68% of XXXXX[.]
"Direct cost" exemption after 1996
Section 6 of Part VI to Schedule V was amended effective January 1, 1997 to provide a two-part test depending on whether the body has charged an amount as tax in respect of the supply. The definition of "direct cost" was also amended to include the consideration paid by the supplier for the acquisition or importation of the good or service, the GST payable by the supplier, and any tax, duty or fee prescribed for the purposes of section 154 (e.g., provincial sales tax). Under the new direct cost provision, a supplier that sells goods or services on an exact cost recovery basis can choose to sell them as either taxable or exempt.
With respect to the resupplies of transportation services made by XXXXX after XXXXX, where the Board did not charge an amount as tax, the resupply was exempt if the charge to the other boards did not exceed the direct cost of the bus operator costs. However, the facts show that XXXXX charged an amount as tax. In this case, if the consideration charged by XXXXX was equal to or greater than the direct cost of the bus operator costs, less the GST paid by XXXXX, the resupply was taxable.
In addition to a rebate, as a registrant, XXXXX is entitled to input tax credits for the GST it paid on its purchases related to the resupply of the taxable transportation services. To claim the rebate and input tax credits for bus operator expenses, the Board would apportion the GST it paid on a reasonable basis between exempt and taxable activities.
For example, assume XXXXX paid $20,000 plus $1,400 GST to the bus operator for transportation services. It resupplied 50% of this transportation service on a taxable basis to the other school boards. XXXXX would apportion 50% of the x $1,400 GST it paid to taxable activities and could thus claim an input tax credit of $700, which is the portion related to the taxable resupply. The Board could then claim a 68% rebate based on the remaining x $700 GST it paid for the particular supply.
f) Supporting documentation for rebate claims
Subsection 286(1) of the ETA requires every person who carries on a business or who is engaged in a commercial activity in Canada and who makes an application for a rebate or refund to keep records in such form and containing such information that will enable the determination of the amount of any rebate or refund to which the person is entitled.
In the case at hand, subsequent allocations of expenses are made by means of journal entries. The documentation requirements would not be met where the rebate claimant does not have an invoice in its name. A journal entry, used as a request for payment, is not sufficient to support a rebate claim as it does not provide evidence regarding the amount of tax, nor does it prove tax was paid by the rebate claimant. Thus, the Department requires an invoice or other appropriate document that provides evidence of the tax that was charged and paid.
Other Matters
Further to our discussion about rulings and with respect to Headquarters replying directly to XXXXX please note that in accordance with Chapter 1.4 of the GST Memoranda Series, the Department does not normally issue a ruling, nor provide an interpretation, to a taxpayer when that taxpayer is subject to a possible audit assessment. However, you may provide the above information directly to XXXXX[.]
Should you have any further questions or require clarification on the above matters, please do not hesitate to contact me at (613) 952-6761.
Yours truly,
Susan Eastman
Charities and Non-Profit Organizations Unit
Public Service Bodies and Governments Division
c.c.: D. Jones, A/Director
M. Place
S. Eastman
P. Labbé
| Legislative References: |
ETA, sections 169, 259; section 6 of Part VI of Schedule V |
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