Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 234969
Attention: [Client]
Dear [Client]:
Subject: GST/HST RULING
[…][Loan Guarantee Program]
Thank you for your correspondence of [mm/dd, yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to the […][loan guarantee program].
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
From your correspondence dated [mm/dd, mm/dd, and mm/dd, yyyy], our telephone conversation of [mm/dd, yyyy] and the documents you have provided to us, we understand the following:
1. Under the […] ([…] [Provincial Act]) :
- […][About the administration of laws].
- […][Allows for the establishment of a Program].
- […][Allows for the guarantee of a loan].
2. […][Pursuant to the Provincial Act the Program is established and continued].
3. As defined under the Program Guidelines webpage at […] :
[…][Definitions provided]
4. Under the […][Provincial legislation]:
- […][Indicates the purpose of the Program].
- […][States the intent of the Program].
- […][Outlines the requirements of participants].
- […][Describes the use and purpose of an assurance account].
- […][States the purpose of the loan].
- […][Indicates conditions of issuing an order form].
- […][Indicates conditions of using an order form].
- […][Requires participants enter into a contract, which outlines the terms and conditions].
- […][Description of contractual requirements].
- […][Description of how proceeds of sale are applied].
- […][Description of guarantee agreement].
5. Under the […] webpage at [...]:
- […][Description of how the Program works].
- […][Description of how loan guarantee is allocated to participants subject to a loan agreement].
Loan Agreement
6. A sample copy of a […][loan agreement] with the […] [[…](Lender)] was provided to us. […][Regional Entities] borrow from a variety of different lenders, but the [Lender] loan agreement is representative of the others.
7. […][Description of requirements under the loan agreement].
8. The following security is required:
[…]
9. The following financial covenants are required:
[…]
[Contract]
10. […][Description of ownership].
11. […][Description of the payment of net proceeds].
12. […][Requirement to have necessary financial resources].
13. […][Use of loan is restricted to its intended use].
14. […][Purchase will be in the name of the Regional Entity].
15. […][Condition stating that the member cannot claim any security interest].
16. […]:
[…][Actions required to be taken by the member]
17. […][Permission to enroll in risk management programs].
18. […]:
[…][Outlines the conditions for Regional Entity to pay the member the net proceeds].
19. […]:
[…][Outlines the conditions for Regional Entity to return the member’s deposit]
20. […]:
[…][Outlines the conditions for Regional Entity to transfer ownership of residual livestock]
21. […] outlines the circumstances where a [Regional Entity] may take possession of some or all the [livestock] purchased under the [contract] and sell [the livestock].
22. […][Order form is part of the contract]:
- […][Description of the order form].
- The member is also required to confirm the amount spent, along with related expenditures, on the [livestock] purchased in relation to the [order form].
Correspondence
23. The [Program] operates whereby a not-for-profit [Regional Entity] negotiates bulk lending from a financial institution for [livestock] purchases by its members. Each [Regional Entity] member determines the funds they request from the [Regional Entity], purchases the [livestock], is responsible for all care and feeding costs, and sells the [livestock].
24. [Regional Entities] do not make any profit off of the loan. Operating revenue is only generated through […]. These are charged on a cost recovery basis.
25. While the [Regional Entity] retains legal ownership of the [livestock], the members, not the [Regional Entity], make the decisions and arrangements relative to livestock purchases, management, and sales. Members use [order forms] issued by the [Regional Entity] to purchase [livestock] and have discretion to purchase [livestock] from whomever they choose and the [livestock] to purchase. Members negotiate, or bid, a price for the [livestock], but their purchase cannot exceed what is approved by the [Regional Entity] through the [order form] and any unused amounts are returned to the [Regional Entity].
26. The [Regional Entity] does not record the [livestock] for inventory purposes on its financial statements. Its statements show the asset as either a contract or loan receivable and on the liability side it would be noted as a loan payable to lender or bank loan. Members record the [livestock] as inventory on their financial statements, and the loan as a liability.
27. The [Regional Entity] carries an insurance policy on the [livestock], which the member is charged for as part of his or her agreement. Any proceeds from insurance claims go directly to the loan. Any death loss not covered by insurance, is absorbed by the member. The member is still responsible for covering the full amount of their obligation.
Member and [Regional Entity] Loan Default Process
28. […]. You also outlined the loan default process in your correspondence:
- Generally, shortfalls are addressed by the following steps below:
- Member is asked to pay any shortfall out-of-pocket;
- […][Additional steps of the default process are outlined]
- [Regional Entity] may take legal action against the member to recover funds used through the assurance account and any cash reserves, such as lien on the sale of a property.
- A member is responsible for their individual debt related to borrowings from the [Regional Entity]. Other members are also responsible for any shortfalls but their liability is limited to their security deposits held by the [Regional Entity], and potentially any future profits from [livestock] they sell.
- The manner in which the government guarantee is calculated, it minimizes the risk of non-defaulting members future profits being used to cover an outstanding debt. In the unlikely case that the […] guarantee is insufficient, then the profits from these members may be at risk.
- […].
RULING REQUESTED
You would like to know whether [Regional Entity] members are supplying a taxable service to the [Regional Entity] and therefore would the proceeds remitted to the members from [livestock] sale attract HST.
RULING GIVEN
Based on the facts set out above, we rule that:
The members are considered the recipients of the supply of the [livestock] when they first acquire the [livestock] under the name of the [Regional Entity]. The members are also considered the suppliers of the [livestock] when they are ready for market and sold.
The members, when selling the [livestock], are not required to charge HST since they are making a zero-rated supply pursuant to section 1 of Part IV of Schedule VI to the ETA.
As members are considered to be both the recipients and suppliers of the [livestock] they are not providing a service to the [Regional Entities].
The [Regional Entities] provide an exempt financial service of lending money to its members.
EXPLANATION
The agreements signed between the members and the [Regional Entities] state that the members agree that the [Regional Entity] is the owner of the [livestock] and that the members shall not have the right to use the [livestock] as collateral or security or encumber title thereto in any manner whatsoever. In other words, the [livestock] are purchased in the name of the [Regional Entity] […]. The [Regional Entity] retains legal ownership of the [livestock] at all times or until the loan is paid off.
All expenses associated with the purchase and sale of the [livestock] are incurred in the name of the [Regional Entity]. When the [livestock] are purchased, the member must ensure that the purchase document for the [livestock] names the [Regional Entity] as owner of the [livestock].
When the [livestock] are sold, the purchaser pays the [Regional Entity]. The proceeds are applied to the loan, which is equal to the principal and the interest charged by the financial institution. The [Regional Entity] then provides the member with the net proceeds, if the member or [Regional Entity] are not in default.
Under subsection 123(1):
Recipient of a supply of property or a service means:
(a) where consideration for the supply is payable under an agreement for the supply, the person who is liable under the agreement to pay that consideration,
(b) where paragraph (a) does not apply and consideration is payable for the supply, the person who is liable to pay that consideration, and
(c) where no consideration is payable for the supply,
(i) in the case of a supply of property by way of sale, the person to whom the property is delivered or made available,
(ii) in the case of a supply of property otherwise than by way of sale, the person to whom possession or use of the property is given or made available, and
(iii) in the case of a supply of a service, the person to whom the service is rendered,
and any reference to a person to whom a supply is made shall be read as a reference to the recipient of the supply;
Supplier, in respect of a supply, means the person making the supply; and
Supply means, subject to sections 133 and 134, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition.
Sale, in respect of property, includes any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer ownership of the property.
Although the [Provincial legislation] and legal agreements indicate that the [Regional Entity] has legal, beneficial and equitable interest in the [livestock] acquired by the member through the issuance of [order form], it is the member who has possession, use, risk and control of the [livestock].
Members are responsible for the individual loans advanced to them through the [order forms]. Members assume the risks of ownership, agree to maintain the health of the [livestock] and to pay all related costs. Members are responsible for repaying the loan in a case of loss of [livestock] and are also responsible for insurance coverage. It is the member who makes the decisions and arrangements relative to livestock purchases, management, and sales of the [livestock]. Members are allowed to enroll in any risk management programs in their own name and receive any benefits from those risk management programs directly. The member and not the [Regional Entity] records the [livestock] as inventory on their financial statements.
The [contract] and [order forms] between the members and the [Regional Entity] are intended to secure the debt related to the purchase of the [livestock]. The transfer of ownership of the [livestock] to the [Regional Entity] and payment of funds to the [Regional Entity] on the sale of the [livestock] is for the purpose of securing payment of the debt, which has been incurred by the member. Upon payment in full of the debt, legal title of any residual [livestock] can be transferred to the member.
The [Regional Entity] assists its members in producing [livestock] by providing competitive financing and terms.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling(s) given in this letter provided that: none of the issues discussed in the ruling(s) are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 343-553-3972. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
David Phoenix, CPA, CGA
Services and Intangibles Unit
General Operations and Border Issues Division
GST/HST Rulings Directorate