11755-20(sn)
TELEPHONE 954-8585
FACSIMILE 990-1233
XXXXX July 12, 1995
Dear XXXXX:
In response to a letter of June 2, 1994, from XXXXX , the following summarizes our comments on the issues raised in that correspondence with respect to the application of GST to a XXXXX entered into between XXXXX and XXXXX . A copy of the XXXXX was provided for review.
Our comments were requested as to the nature of the supply made by XXXXX when entering into the XXXXX and the consideration given for that supply. We were also asked for our opinion as to the timing of the liability for tax with respect to the consideration paid.
Our comments are provided under the same headings as those set out in the correspondence received from XXXXX. As you are probably aware, XXXXX has entered into numerous XXXXX with its dealers. The XXXXX are not all identical in the terms and conditions they contain. Our comments refer to the specific agreement entered into by XXXXX with XXXXX . This particular agreement is an example of one of the older XXXXX . You should be aware that numerous amendments have been made to the XXXXX entered into since and that our comments will not necessarily be applicable to those later agreements.
Supply
It is a term of the XXXXX that if XXXXX and XXXXX wish to enter into a XXXXX they must concurrently also enter into a XXXXX . The XXXXX requires XXXXX to make all of its XXXXX purchases from XXXXX for a specified period of time. The entering into of the XXXXX has been interpreted as being the supply of a service provided by XXXXX to XXXXX .
When XXXXX enters into a XXXXX , the transaction is very similar to a tenant entering into a lease. Landlords frequently offer to pay tenants amounts of money called inducements, if the tenant enters into a lease with the landlord. The receipt of the inducement by the tenant has been interpreted as being the receipt of consideration for the taxable supply of the service of signing and entering into the lease. XXXXX is receiving an inducement for entering into a XXXXX . That inducement is perhaps more complicated than the simple payment of money which occurs in the example of the transaction between the landlord and the tenant, but the substance of the transaction does not change. A tenant inducement is interpreted as being consideration for the supply of a service which occurs at the time the lease is signed. In the case of the transaction between XXXXX and XXXXX , the inducement must be seen as being consideration for the supply of the right of exclusive supply which is being provided by XXXXX to XXXXX . The supply will be made over the entire period of time that the XXXXX is in force, and is used by XXXXX each time it sells fuel to XXXXX . The most common form of a tenant inducement is the payment of cash. In the case of the transaction between XXXXX and XXXXX , the inducement is paid under the terms of its own agreement, the XXXXX . Therefore, even though there are some complicating factors, the money received by XXXXX from XXXXX must be regarded as an inducement which is consideration for a taxable supply. The money which is available to XXXXX under the provisions of the XXXXX is only available when XXXXX enters into the XXXXX .
Consideration
The correspondence to us describes the consideration given by XXXXX for the supply by the dealer of the exclusive right to supply as an amount of money that is forgivable loan but the position has been taken that the amount of money is not a financial instrument and that it is consideration for a taxable supply and therefore subject to tax.
As previously discussed, although the transaction is complicated, XXXXX is providing a taxable supply of a right to XXXXX and XXXXX is giving as consideration for that supply, the amounts of money as described under the XXXXX . XXXXX uses that right every time it sells XXXXX to XXXXX and it pays XXXXX for the use of that right, at a rate per XXXXX purchased. However, to aid XXXXX in financing improvements to its facilities, XXXXX prepays a certain amount of the consideration it is giving for the use of the right of exclusive supply. To the extent that XXXXX prepays consideration, it is not required to pay a rate per XXXXX as XXXXX makes its XXXXX purchases. This payment arrangement creates the impression that XXXXX has given XXXXX a loan. XXXXX may take the position that it has made a loan to its dealer, but the only reason that XXXXX has received this money is because it made a taxable supply of a right to XXXXX . XXXXX is therefore making a prepayment to XXXXX and not a loan.
Timing of the Liability for Tax
The XXXXX was entered into on XXXXX . The payments to be made under the XXXXX are to be paid "as soon as reasonably possible after the parties have executed this Agreement". No information has been provided as to the specific date of those payments. We are assuming that all of the payments would have occurred before any of the transitional rules of the Excise Tax Act ("the Act") would apply and that therefore, although the payments should be treated as consideration for a taxable supply, the timing of their payment is such that GST would not be applicable.
The correspondence from XXXXX asked us to consider that the "monies are only "paid" over the life of the agreement as they are contingent upon performance of the dealer."
Paraphrased, section 133 states that where an agreement is entered into to provide property or a service, the entering into of the agreement is deemed to be a supply of the property or service made at the time the agreement is entered into and when it occurs, the actual provision of the property or service is deemed to be part of that initial supply and not a separate supply. The provisions of section 133 will therefore act to tax the prepayment made by XXXXX to XXXXX at the time the prepayment occurs. In this particular instance, the prepayment occurs at a time before any of the provisions of the Act can apply to tax the amount paid. However, if the prepayment had occurred at a time when the transitional provisions of the Act would apply, or if the prepayment occurred after 1990 such that the general provisions of the Act would apply, tax would be exigible at the time the payment is made. The fact that the payment has not been "earned" is perhaps an issue for income tax, but a payment does not have to be "earned" to be subject to GST.
The issues presented by XXXXX for our comments did not include any request for a discussion of the application of GST to the payments required under the agreement when it either expires and is not renewed, or it is terminated early for any reason. The application of tax to these payments is currently under discussion. When the various issues have been resolved, our comments will be provided under separate cover.
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)
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Application Team
XXXXX
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