6 March 2007 GST/HST Interpretation 85838 - GST Ruling on "incoming collect" freight

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your XXXXX correspondence XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a lease payment made under a lease agreement entered into by a municipality before March 10, 2004.

All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, unless otherwise specified.

We understand that a tenant sent in their annual percentage rent cheque to XXXXX (the City), adding the GST to their payment. In the past, the tenant would forward such payments without any GST. The tenant made the payment pursuant to a written lease agreement for real property entered into with the City XXXXX, for a term of XXXXX years.

XXXXX the lease agreement provides for the calculation of the lease payments. Some of the lease payments are based on a specified percentage of income from XXXXX and sales. As a result, the lease payments may vary from year to year depending on the income for a given year.

XXXXX the lease agreement indicates that the lease payments are to be reviewed every XXXXX years. The lease agreement provides the manner in which the lease payments will be reviewed, however, this information has not been provided to us. Since the lease agreement was entered into, a XXXXX-year review was scheduled to occur on XXXXX, and on XXXXX. The next review is scheduled for XXXXX.

Interpretation Requested

You would like to know the following:

1. Should the GST paid to the City be refunded to the tenant?

2. If the tenant has changed from a non-GST registered status to a GST registered status, should the GST still be refunded?

Interpretation Given

A supply of real property made by a "public service body" is generally exempt under section 25 of Part VI of Schedule V to the ETA. A public service body is defined in subsection 123(1) and includes a municipality. Bill-C30, which received Royal Assent on May 14, 2004, amended section 25 of Part VI of Schedule V. As a result of the amendment, a supply of real property made by a municipality and a supply of real property that is designated municipal property (Designated municipal property" is defined in subsection 123(1).) made by a person designated to be a municipality for purposes of section 259 are now excluded from the exemption under section 25 of Part VI of Schedule V.

The amendment applies to any supply for which consideration becomes due after March 9, 2004, or is paid after that date without having become due. However, the amendment does not apply to any supply made under an agreement in writing entered into before March 10, 2004.

Supplies made by a municipality pursuant to a written lease agreement entered into before March 10, 2004, remain exempt if they were exempt under section 25 of Part VI of Schedule V prior to the amendment. If novation has occurred in respect of that lease agreement after March 9, 2004, a new lease agreement is considered to have been entered into. Any supply made under the new lease agreement will not be exempt under section 25 of Part VI of Schedule V if the consideration for the supply becomes due after March 9, 2004, or is paid after that date without having become due.

GST/HST Policy Statement P-249, Agreements and Novation explains how to determine if an existing agreement is terminated and a new agreement is entered into and, as a result, whether novation has occurred. Whether novation has occurred is a question of fact and law. Usually, novation will have occurred if an agreement is considered to have been modified, varied or otherwise materially altered to such an extent that it materially affects the rights and obligation of the parties to the agreement by extinguishing either the rights or obligations of either party to the agreement and creating new ones, or by introducing another party to assume the rights or obligations of an existing party.

A lease payment may vary from year to year based on a formula specified in a lease agreement for a particular point in time where that formula includes a specified percentage of certain income. Novation does not occur as a result of these variations in the lease payments since the calculation of the lease payments is specifically provided for in the lease agreement.

Where a lease agreement provides that the lease payments are to be reviewed every XXXXX years, novation may occur depending on the terms of the lease agreement and the manner in which the lease payments are reviewed. The next XXXXX-year review will occur on XXXXX. The CRA will provide its view on whether novation occurs at the request of the parties involved. Should you wish to obtain our view, a copy of the entire lease agreement, together with a request from the City and the tenant should be sent to:

XXXXX

Where a lease payment relates to a supply that is exempt under section 25 of Part VI of Schedule V, a person who is the recipient of the supply is not required to pay the GST whether or not the person is registered for the GST/HST. Where a person pays an amount as or on account of the GST to the supplier (i.e., the lessor), the supplier is required to account for that amount in its net tax calculation for the reporting period during which the amount was collected.

Where a supplier has not charged tax but has collected from a person an amount as or on account of the GST in excess of the amount that was collectible, subsection 232(1) provides that the supplier may refund or credit the excess amount to the person within two years after the date the amount was collected. A supplier that refunds or credits such an amount must issue a credit note, containing prescribed information, for the amount to the person within a reasonable time unless the person issues a debit note containing the prescribed information. The supplier may then deduct the amount refunded or credited in determining its net tax for the reporting period in which the credit note is issued (or debit note received) to the extent that the amount was previously added to their net tax. For additional information, please refer to GST/HST Policy Statement P-030R Credit/Debit Notes and Net Tax Adjustments. Information regarding the prescribed information to be included in a credit or debit note is included in our guide RC4022, General Information for GST/HST Registrants. Visit our Web site at www.cra.gc.ca to access the documents referred to in this interpretation.

The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.

For your convenience, find enclosed a copy of GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 957-8222.

Yours truly,

Francine Ménard
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2007/03/08 — RITS 86030 — XXXXX Concerning an Out-of-Court Settlement