Dear Mr. XXXXX
Re: XXXXX
This is in reply to your memorandum of November 10, 1994 addressed to this office requesting our interpretation of the status of certain services provided by the above-noted registrant.
Statement of Facts
Our understanding of the facts is as follows:
1. XXXXX is engaged by XXXXX as a promoter in respect of the offering of the partnership units in XXXXX[.]
2. XXXXX limited partnership which owns a partnership interest in XXXXX which owns a residential complex in XXXXX[.]
3. The general partner in the XXXXX partnership is XXXXX a corporation controlled by XXXXX[.]
4. XXXXX has three classes of partnership units, A, B and C.
5. Under the XXXXX dated June 28, 1992, the services provided by XXXXX include, but are not limited to:
Administrative Service
• manage all aspects of the administration of the limited partnership including mailings to limited partners, enquiries, etc. ...; annual fee of up to XXXXX
Cash Flow Guarantee
• provide cash flow loans to XXXXX when its share of net operating income from the project is less than a specified amount; fee of XXXXX
Transaction Structuring Service
• provide financial structuring of the offering and administration of the completion of the offering; fee of up to XXXXX
Sales Cost and Offering Costs Service
• arrange for the sale of the partnership units;
• on behalf of XXXXX pay all expenses incurred in connection with the offering including legal fees, accounting fees, tax opinions, marketing, printing and advertising costs; fee of up to XXXXX
Equity Loan Arranging Service
• arrange for the financing of the cash portion of the acquisition cost of Class B units less the initial deposit; fee of XXXXX
6. The registrant has treated the above services as follows:
• administration - taxable;
• cash flow guarantee - exempt;
• transaction structuring fee - taxable;
• sales cost and offering cost service - taxable except that the registrant has reduced the fee on which GST is calculated by the commission paid to the brokers for selling the partnership units;
• equity loan arranging service - exempt.
Registrant's Position After Audit
1. XXXXX is providing a single service of arranging for the sale of partnership units in the limited partnership. The various functions performed under the agreement are inputs into the provision of this service. XXXXX receives a separate fee in respect of each "input" into the service only due to income tax implications.
2. If each "input" into the service is in fact considered to be a separate supply, then the registrant believes that the cash flow guarantee service should be exempt under paragraph 123(1)(e) of the definition of financial service since it is guaranteeing a line of credit to the limited partnership and not a specific level of income.
XXXXX Interpretation and Services Position
1. The administration service is a taxable supply since it falls outside the definition of "financial service" in subsection 123(1).
2. The cash flow guarantee is a taxable supply since the guarantee is in respect of a specific level of income and not in respect of a financial instrument (123(1)(e)). The line of credit is contingent upon a certain revenue level not being met and therefore, the guarantee is in respect of this revenue level and not the line of credit.
3. The transaction structuring service is a taxable supply.
4. The sales costs and offering costs service comprised of a taxable service and a financial service (i.e., arranging for the sale of the partnership units). As a result, unless the consideration for the financial service of arranging for the sale of partnership units exceeds 50% of the total consideration, the entire fee is taxable.
5. The equity loan arranging service is a financial service under paragraph 123(1)(l) of the definition of financial service and is therefore exempt.
6. Since there is no indication that XXXXX is acting as agent for XXXXX with respect to the Sales and Offering Costs, in accordance with section 178, the consideration for the supply should not be reduced by the amount paid to brokers to sell partnership units.
Interpretation Requested
You have requested our opinion with respect to the following:
1. Are XXXXX services a single or multiple supply?
2. If the services are multiple supplies, then what is the correct tax status of the cash flow guarantee?
Interpretation Provided
Single or Multiple Supply
Whether there is a single or multiple supply is a question of fact that must be determined on a case by case basis. In accordance with policy statement P-077 "Single and Multiple Supplies", the factors to be considered include:
1. Are the various elements actually supplies or are they merely inputs used in the making of a supply?
2. Whether there are a number of suppliers and/or recipients.
3. The provisions of the contract or agreement and terms of an invoice.
4. If all the elements were not received, would each in itself be of any use to the customer, given the context of the transaction?
5. Is the provision of a particular element contingent on the provision of another element?
6. Is the customer aware of the specific elements?
Based on the information provided in your memorandum and in the A XXXXX it is our view that the elements do not constitute a single supply from XXXXX as suggested by the registrant but are multiple supplies.
The agreement between the parties clearly spells out the services to be provided and attaches a separate fee to each service. The customer is made aware of the different elements and the fee that is payable for each element. The provision of the various services fall within the definition of supply in subsection 123(1), i.e., "... the provision of property or a service in any manner, ...". The elements are not consumed by XXXXX and therefore cannot be said to be inputs of XXXXX
The terms of the agreement indicate that most of the services are provided to XXXXX However, the equity loan arranging service is provided to the limited partners. This indicates that the equity loan arranging service is a separate supply from all the other supplies given that the recipient of this supply is different from the recipient of the other supplies. In addition, the provision of income tax information and assistance to limited partners in preparing XXXXX income tax returns is an element provided by a different person, i.e. XXXXX This indicates that the supply is separate from the other supplies.
From the perspective of XXXXX it requires all the services to operate the limited partnership. However, it is not necessary that all the elements be supplied by XXXXX t would be possible for separate parties to supply the services specified and each would still be of use to XXXXX in the context of the transaction. It is for the benefit of XXXXX and because XXXXX controls the corporation which is the general partner that it has the exclusive right to supply the services. For example, the advice and financial structuring of the offering would be useful to XXXXX even if XXXXX did not arrange for the sale of the partnership units. It is not necessary that XXXXX sell the partnership units for XXXXX this function could be undertaken by another party.
Given that the general partner in XXXXX is controlled by XXXXX and may not be given the option of acquiring one element without acquiring all the elements, it may be argued that all the elements are contingent on each other. However, in this particular case, this is not a decisive factor.
Since the services under the agreement between XXXXX are multiple supplies, the status of each supply must be examined to determine if tax is exigible.
Tax Status of Cash Flow Guarantee
Under the XXXXX will, for a period of five years, guarantee that XXXXX share (as partner in XXXXX of the net operating income from the rental of the residential complex (gross rental revenue less operating expenses) will be at least equal to a specified amount. If the net operating income is not equal to the guaranteed amount, XXXXX will make interest-free cash flow loans to XXXXX sufficient (i) to permit XXXXX to contribute additional capital to meet its share of operating expenses and (ii) to distribute to each Class B unit holder sufficient cash to enable the Class B unit holder to make payments due under a promissory note payable to XXXXX that each Class B unit holder is required to tend
The amount that is due under the promissory note payable to XXXXX obligation under a similar note given to XXXXX which represent XXXXX share of the first mortgage on the residential complex.
XXXXX is entitled to recover the above advances from the cash flow in excess of the guaranteed amount received by XXXXX during the five year guarantee period and for an additional three years after that period has expired. In the event of failure XXXXX to repay the advances within thirty days of the date required for payment, XXXXX ceases to be obligated to make advances under the Cash Flow Guarantee.
In the event that the residential complex is sold or if the XXXXX Interests are sold during the eight year recovery period, the outstanding cash flow loans become payable in full.
It is our view that the cash flow guarantee does not fall within paragraph (e) of the definition of financial service since it is not a guarantee in respect of a line of credit as stated by the registrant. In addition, the "interest free loan" does not constitute the provision of an advance, credit or a loan so as to fall under paragraph (g) of the definition of financial service.
In Alberta & Southern Gas Co. Ltd. v The Queen, 76 D.T.C. 6362 (FCTD), aff'd. 77 DTC 5244 (FCA), aff'd. 78 DTC 6566 (SCC), the taxpayer purchased a working interest in an oil well for $4 million. Under the terms of the purchase agreement, the taxpayer was to receive a fixed percentage of production, but once it had received production having a value equal to $4 million plus 3% interest, its right to receive production would cease. In addition, the taxpayer had the right to receive payment in cash rather than in crude oil. The Minister contended that the transaction should be characterized as a loan. The court disagreed and stated,
" In my view the transactions are not temporary loans by the plaintiff to Amoco for the reason that an essential element of a loan is lacking. The essence of a loan is that the advance shall be repaid. The agreements provide that nothing there shall be construed as creating a personal liability on Amoco to repay the principal sum advanced and interest theron but that the plaintiff for its reimbursements shall look exclusively to the petroleum substances to the extent of Amoco's share therein which was assigned to the plaintiff. In the event that the petroleum substances should become exhausted, or otherwise unavailable, which is a distinct possibility which remains even though the plaintiff exercised extreme care in selecting fields for inclusion in the schedules to the agreements in which it was aware of the potential and estimated deposits underground, then in that event the plaintiff has no recourse against Amoco."
The Alberta & Southern Gas Co. Ltd. case reinforces the principle that a transaction will not normally be considered to be a loan unless the person receiving the funds is under some obligation to return those funds.
In the current case, any payments made to XXXXX are recoverable by XXXXX only to the extent that XXXXX share of the profit in XXXXX exceeds a specified level. In addition, following the eight year recovery period, XXXXX has no recourse against XXXXX It is our view that such an arrangement does not constitute a loan or a line of credit.
It may be possible to argue that the service provided under the cash flow guarantee still falls within paragraph (e) if it is a guarantee in respect to a partnership interest, i.e. XXXXX interest in XXXXX However, it is our view that the guarantee cannot be "in respect of" the partnership interest since a guarantee implies that there is some obligation that must be performed by one party XXXXX and that is to be guaranteed by another party XXXXX .
There is no obligation on the part of XXXXX to have a specific level of income. Therefore XXXXX cannot guarantee that the income from XXXXX partnership interest in XXXXX will be a specific level. XXXXX is providing a guarantee that XXXXX ill have a certain level of cash at a given time if certain events do not occur, i.e. if there is not a specified level of income from the partnership. However, it is not providing a guarantee in respect of a financial instrument since there is no financial instrument that has as a term the obligation to earn a certain level of income.
Since the cash flow guarantee provided by XXXXX is not a loan or line of credit and is not a guarantee in respect of a financial instrument, it does not fall within the definition of a financial service and is therefore a taxable supply.
We would also like to comment on the tax status of the sales cost and offering costs service. You have taken the position that the sales cost and offering costs service is comprised of a taxable service and a financial service (i.e. arranging for the sale of partnership units). Further, it is stated that unless the consideration for the financial service of arranging for the sale of partnership units exceed 50% of the total consideration, the entire fee is exempt. Since this is not the case, your position is that the fee is taxable.
Under section 139, where the consideration for a financial service which is supplied together with a non-financial service would be greater than 50% of the total of all amounts, each of which would be the consideration for the service so supplied if that service had been supplied separately, the supply of each of the services is deemed to be a supply of a financial service. However, there is no provision which would deem an otherwise exempt supply to be taxable where the consideration for the taxable supply, if supplied separately, would exceed 50% of the total.
Based on the description of the sales costs and offering costs service, it appears that it is possible that the acquisition of services and the payment by XXXXX of expenses incurred in connection with the offering of the partnership units may be part of the arranging for a financial service. If this is the case, the fee would be exempt.
If you have any questions, please contact P. Roach at (613) 952-9214 or A. Bell at 952-9219.
Your truly,
J. Sitka
A/Director
Financial Institutions/Corporate Reorganizations
GST Rulings and Interpretations
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