11755-20(sn)
TELEPHONE 954-8585
FACSIMILE 990-1233
XXXXX July 13, 1995
Dear XXXXX
This is in reply to September 17, 1992 correspondence received from XXXXX , of your office wherein he forwarded to us correspondence received from XXXXX . XXXXX has requested a ruling in regard to the tax status of two grants that they give to two different grantees. Our understanding of the terms of the agreements and our opinion as to the application of GST to same follows. Please accept our apologies for the delay in this response.
Background
XXXXX has asked for a review of two different agreements. One agreement is an XXXXX entered into between XXXXX and the XXXXX
Reference should be made to our correspondence to you with respect to the application of GST to a XXXXX entered into by XXXXX and any Co-op. The agreement entered in by XXXXX and XXXXX is the identical agreement. Our comments with respect to this specific agreement entered into by XXXXX and XXXXX are therefore the same as those given with respect to the standard agreement.
The second agreement is a XXXXX ("the Agreement") entered into by XXXXX ("the Co-op"), XXXXX ("the dealer") and XXXXX .
1. The dealer has agreed to establish a XXXXX retail gas outlet and the Co-op and XXXXX have agreed to advance certain amounts to assist in the project.
2. The Co-op provides a loan to the dealer to purchase and install equipment. The loan is repayable in equal monthly installments. If the Agreement is defaulted, from the date of default and until payment is made in full, interest at the rate of XXXXX per year will be calculated, otherwise, the loan does not bear interest.
3. XXXXX provides a grant to the dealer in the same amount as the loan being provided by the Co-op. In the event that the dealer defaults the Agreement, a provision of the Agreement allows XXXXX to recover from the dealer, the amount of the grant paid, as "liquidated damages".
4. To receive the financial assistance provided by the Co-op and XXXXX , the dealer is required to supply certain rights to both the Co-op and XXXXX . The supply of rights include the entering into of an agreement with XXXXX for the purchase or installation, or both, of the equipment for the XXXXX facility if XXXXX prices for the equipment or installation are competitive, the entering into of a XXXXX with the Co-op and the entering into of a XXXXX with the Co-op. Although copies of these separate agreements have not been provided, your correspondence to us indicates that the dealer agrees to purchase all of its requirements for petroleum products from XXXXX through the Co-op, by signing the XXXXX . It is assumed that similar exclusive rights of supply are given by the Co-op to XXXXX when the XXXXX is entered into.
5. The dealer grants to the Co-op a first security interest in certain personal property which is described in a schedule attached to the Agreement.
6. Under a separate Co-op Security Agreement, XXXXX agrees to lend to the Co-op, the amount of money that the Co-op has agreed to lend to the dealer. Interest is payable in the same circumstances and at the same rate that interest is payable by the dealer to the Co-op. In the event of default, the Co-op is required to repay the loan to XXXXX .
7. The Co-op provides XXXXX with a security interest in the Co-op Security Agreement.
Questions
You have asked for our opinion of the tax status of the grant being provided by XXXXX to the dealer.
Discussion
The provision of the grant by XXXXX to the dealer is not subject to tax unless it is consideration for a taxable supply. In the case of the grant being paid by XXXXX , the dealer supplies certain rights to the Co-op and XXXXX as a direct result of receiving the grant. These rights include the exclusive right of XXXXX to supply petroleum products to the dealer through the Co-op. There is also a supply of a right to XXXXX by the dealer of agreeing in principle to purchase equipment and installation services from XXXXX if pricing is competitive. The grant therefore becomes consideration for taxable supplies being made by the dealer to both the Co-op and XXXXX . Even though XXXXX does not receive all of the supplies, XXXXX is required to pay the grant, becoming by definition, the recipient. The dealer would collect the tax payable on the grant from xxx.
In the event that the dealer defaults on the Agreement, the dealer must pay an amount back to XXXXX , as "liquidated damages". That amount is calculated as being the same as the amount of the grant initially paid by XXXXX to the dealer.
The application of GST to amounts paid as a result of a default or termination of an Agreement is currently under discussion. Our comments as to the application of tax to these payments will be provided under separate cover when those discussions have been completed.
Should you require any further assistance in this matter, contact one of the members of the Application Team in the Tax Provisions Unit. They are: Lalith Kottachchi (613) 952-9588, Ken Mathews (613) 952-9585, Suzanne Leclaire (613) 954-7931, and Sara Nixon (613) 954-4397.
Yours truly,
H.L. Jones
Director
General Applications Division
GST Rulings & Interpretations XXXXX
Mitch Bloom (signoff)
c.c.: Application Team
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