11755-20(sn)
TELEPHONE 954-8585
FACSIMILE 990-1233
XXXXX July 13, 1995
Dear XXXXX
This is in reply to September 24, 1992 correspondence received from XXXXX , of your office wherein he requests our opinion concerning the GST treatment of payments made by XXXXX under the terms of a XXXXX ("the Agreement"). The correspondence attached a blank copy of the Agreement for our review. Our understanding of the terms of the Agreement and the application of GST to it is as follows. Please accept our apologies for the delay in this response.
Background
1. XXXXX supplies XXXXX products to Co-ops. A Co-op wants to upgrade or construct its XXXXX facilities using a design approved by XXXXX To promote the sale of XXXXX products, XXXXX has encouraged the Co-op to upgrade or construct its XXXXX facilities and is prepared to assist the Co-op to pay the costs involved in the upgrade or construction. The assistance provided is both monetary and non-monetary.
2. Non-monetary assistance takes the form of provision, where possible, of all equipment and related materials. If XXXXX is unable to supply equipment or related materials, XXXXX will assist the Co-op to obtain them from other suppliers.
3. To the extent that XXXXX supplies equipment and related materials, XXXXX does not recover such costs from the Co-op.
4. Where the Co-op contracts for work to be done and receives invoices for the completion of such work, the Co-op is required to present such invoices to XXXXX within 10 days of their receipt. XXXXX then provides monetary assistance to the Co-op which the Co-op can use to pay such invoices. XXXXX does not pay the invoices on behalf of the Co-op.
5. The monetary assistance provided by XXXXX is apportioned between a grant and a loan. There is no requirement for the grant to be repaid provided that all other terms of the Agreement are met. One-third of the loan is repayable within thirty days after the facility upgrade is substantially complete. A second one-third payment is due one year after the first payment date and the final one-third payment is due one year after the second payment date. Interest is also payable on any unpaid balance at a specified rate.
6. To receive this assistance, the Co-op agrees to purchase solely from XXXXX , all of its requirements for XXXXX products for a period of ten years from the date that the facility upgrading project is substantially complete. This purchase agreement is a condition of the XXXXX and no separate agreement exists. There are no minimum monthly or yearly purchase levels to be maintained and no volume rebates or subsequent purchase discounts.
7. In the event that the Agreement is terminated before completion, the Co-op is required to pay the outstanding principal balance of the loan, the accrued interest on outstanding loan balance at the date of termination, as well as a pro-rated amount of the grant portion of the monetary assistance. Interest at the rate of 10% per annum calculated on the portion of the grant to be repaid, from the date XXXXX provided the grant to the Co-op until the amount is paid in full, is also payable.
8. XXXXX retains title to the equipment and materials it provides to the Co-op and a security interest in the equipment and materials purchased by the Co-op with respect to the facility upgrade, until the loan portion of the financial assistance is repaid in full.
9. The Agreement provides for an estimate of the grant and the loan to be provided by XXXXX , however, paragraph 5.2 provides that actual costs to complete the upgrade will be used to determine the actual amounts of the grant and the loan given.
Questions
You have asked if GST applies to the grant portion of the monetary assistance paid by XXXXX to the Co-op and also for the tax consequences that would arise if the Co-op defaults on the Agreement.
Discussion
A discussion of the taxable status of the grant paid by XXXXX to the Co-op and the GST consequences of defaulting on the Agreement, requires an understanding of how GST applies to the entire Agreement. Although there is only one Agreement, there is more than one supply being made as a consequence of the Agreement being entered into. It is necessary to identify each of the separate supplies and the consideration which is being given for each of those supplies to properly apply tax to the Agreement.
The Co-op is supplying to XXXXX a right of exclusive supply by agreeing to purchase all of its requirements for petroleum products from XXXXX for ten years. The supply of this type of right is the supply of intangible personal property. The consideration given by XXXXX for that supply is non-monetary, in the form of equipment and materials, and monetary, in the form of a cash grant.
Where XXXXX is giving tangible personal property in the form of equipment and materials, as non-monetary consideration for the receipt of a supply of intangible personal property made by the Co-op (ie. the right of exclusive supply), a barter transaction has occurred. However, the barter rules of subsection 153(3) cannot be used in this particular instance because the property being exchanged between XXXXX and the Co-op is not the same class or kind. Paragraph 153(1)(b) states that where the consideration given is other than money, the fair market value of the non-monetary consideration must be used as the base on which tax is to be paid. The fair market value of the rights and the fair market value of the equipment and materials must be determined and tax accounted for.
The provision of a grant is, in itself, not subject to tax unless it is consideration for a taxable supply. As previously noted, XXXXX is paying a grant to the Co-op as monetary consideration for the taxable supply of the right of exclusive supply of petroleum products for ten years, and is therefore required to pay tax on this amount.
Section 168 will apply to determine the timing of tax payable on the taxable supply of intangible personal property made by the Co-op to XXXXX and the taxable supply of tangible personal property made by XXXXX to the Co-op. Under subsection 168(1), tax is payable on the earlier of the day consideration is paid and consideration becomes due, in respect of a taxable supply. In the case of a barter transaction where the consideration being given is not money, subsection 152(3) states that where consideration that is not money is given or required to be given, consideration that is given shall be deemed to be paid and consideration that is required to be given is deemed to be required to be paid. Whether the properties being exchanged by XXXXX and the Co-op are required to be given before they are actually given, is a question of fact. There is no written provision in the Agreement which sets out that the properties are to be given at an earlier date than the day on which the exchange actually takes place. Unless the parties have agreed otherwise, tax would be payable on the day the properties were actually exchanged and made available for use by each recipient.
XXXXX also provides a loan to the Co-op. The lending of money by XXXXX to the Co-op and the repayment of the loan by the Co-op are financial services by virtue of the definition of that term at section 123. Generally, the supply of a financial service is treated as an exempt supply which does not attract tax.
XXXXX retains title to and a security interest in all equipment supplied by it and by others during the construction project, until the loan portion of the monetary assistance is repaid in full. The transfer of the security interest by the Co-op to XXXXX at the time equipment is delivered to the project and the transfer back of the security interest from XXXXX to the Co-op at the time the loan is fully repaid are deemed not to be supplies under section 134.
In the event that the Co-op defaults and terminates the Agreement entered into with XXXXX , there is provision in the Agreement that the Co-op is required to immediately pay off the outstanding balance of its loan and accrued interest to date and to also pay back a pro-rated amount of the grant as well as an interest component on that pro-rated amount.
The application of GST to amounts paid as a result of a default or termination of the 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
Email this Content