11725-8(km)
XXXXX May 19, 1995
This is in response to a request by XXXXX of your office for our opinion concerning whether certain expenses incurred by XXXXX were incurred as agent for specific property owners. XXXXX has previously discussed this issue with both Ken Mathews and Suzanne Leclaire of my staff.
My understanding of the facts is as follows:
• XXXXX provides property management services to commercial and residential property owners, pursuant to management agreements it has entered into with the various owners.
• XXXXX has provided the Department with its two standard management agreements, one for commercial property and the other for residential property. Both agreements are comprised of four paragraphs and are very similar in content. Copies of each were forwarded to us by XXXXX . XXXXX has indicated that it does enter into some management agreements that differ from these standard agreements.
• Paragraph 1 of both agreements indicates that the property owner "employs" XXXXX exclusively to rent, lease, operate, and manage a specific property for a specific period, and thereafter for annual periods unless the agreement is terminated. Under Paragraph 2a of both agreements, XXXXX accepts the "employment" and agrees to use due diligence in managing the premises according to the terms of the agreement.
• Pursuant to Paragraph 2b of both agreements, XXXXX agrees to render monthly statements of receipts, expenses and charges, and to remit to the property owner receipts less disbursements. Pursuant to the same paragraph, if the disbursements exceed the rents collected by XXXXX , the property owner agrees to pay, upon demand, the amount of the excess to XXXXX .
• Pursuant to Paragraph 2c of both agreements, XXXXX agrees to deposit all receipts collected for the property owner, less any amount properly deducted, in a trust account in a chartered bank, trust company or credit union qualified to engage in the banking or trust business, such account being separate from any personal account of XXXXX . XXXXX will not be held liable in the event of bankruptcy or failure of a depository.
• Pursuant to Paragraph 2d of both agreements, XXXXX agrees that any of its employees who handle or are responsible for the property owner's monies shall be bonded by a fidelity bond.
• Pursuant to Paragraph 3 of both agreements, the owner gives certain specific authority and powers to XXXXX , and agrees to assume the expenses in connection with same. These include the right to sign, renew and cancel leases, to collect rents, to terminate tenancies and to sign and serve in the name of the owner such notices that are appropriate, to hire, discharge, and supervise all labour and employees required for the operation and maintenance of the premises, and to make contracts for electricity, gas, fuel, telephone, snow removal, and other services. Any leases that XXXXX executes for the owner shall not exceed five years.
• Pursuant to Paragraph 3b of both agreements, the owner authorizes XXXXX to make or cause to be made repairs and alterations to the premises. XXXXX must get prior approval from the owner, except under certain specific circumstances, for single expenses exceeding $1000.
• Most expenses incurred by XXXXX in connection with the authority and powers granted it under Paragraph 3 of a standard agreement have been invoiced to XXXXX , with reference to the particular property, and not directly to a specific property owner. XXXXX is then reimbursed by the property owner for the expense.
• Pursuant to Paragraph 4a of both agreements, the owner agrees to save XXXXX harmless from all damage suits in connection with the management of the property and from liability from injury suffered by an employee or other person. The owner agrees to carry the necessary public liability and workmen's compensation insurance to adequately protect both XXXXX and the owner.
• Pursuant to Paragraph 4b of both agreements, the owner instructs and authorizes XXXXX to pay certain amounts, including mortgage payments, property taxes and employee taxes, and to obtain any required insurance, such as fire insurance. XXXXX is instructed to pay for the above from the owners funds, unless it is directed otherwise in follow-up correspondence.
• XXXXX has indicated that any contracts or agreements negotiated by it pursuant to Paragraph 4b of either standard agreement, are between a particular property owner and a supplier.
• Pursuant to Paragraph 4e of the agreement for commercial property and Paragraph 4d of the agreement for residential property, the owner agrees to pay XXXXX specific amounts for specific items (i.e. for management, for leasing, etc.).
• The Department has previously determined that the people hired by XXXXX to work at the various properties it manages are employees of XXXXX and not of the individual property owners, even though XXXXX is reimbursed by the owners for the cost of same.
• XXXXX does not report as its own revenue any of the receipts collected for a property owner neither does it report as its own expense any of the amounts it incurs and for which it is subsequently reimbursed by the property owner.
XXXXX has specifically asked whether XXXXX is incurring the expenses under Paragraphs 3 & 4 of the standard agreements as an agent of the property owners or if the reimbursement of these expenses is deemed, pursuant to section 178 of the Excise Tax Act (ETA), to be part of the consideration for the supply of XXXXX services to the property owners. Our comments that follow are limited to situations wherein XXXXX has entered into a standard agreement and do not extend to variations of those standard agreements.
One must begin by determining if an agency relationship exists between XXXXX and a particular property owner. It is the Department's position that a person will be considered and treated for GST purposes as an agent based on fact and the principles of law. The recent policy statement dealing with the meaning of agency presents three essential qualities which evidence the existence of an agency relationship. These essential qualities can be summarized as the consent of both the principal and the agent to the relationship, the authority of the agent to affect the principal's legal position and the principal's control of the agent's actions. A review of the standard agreements provided by XXXXX indicates that these three essential qualities do exist when such an agreement is in effect between XXXXX and a particular property owner. Therefore, it is our opinion that providing there is nothing to indicate otherwise, an agency relationship exists between XXXXX and a particular property owner when a standard agreement (as provided by XXXXX ) is in effect, and the parties thereto actually conduct their affairs according to the terms of that agreement.
Since we have accepted that, to some extent, an agency relationship exists between XXXXX and a particular property owner, one must then examine individual expenses to determine if they were incurred by XXXXX in that capacity. It is not possible to make a broad statement that all the expenses incurred under either Paragraph 3 or 4 of a standard agreement, are incurred by XXXXX in its capacity as agent for a particular property owner.
The above referenced policy statement on the meaning of agency describes eight indicators which are useful in ascertaining the capacity in which a specific expense was incurred. These eight indicators are:
1. Remuneration - How is XXXXX remunerated for the services it provides to the property owners?
2. Ownership of property - Does ownership of any property acquired pass directly to the property owners? Does XXXXX have the right to use such property?
3. Liability of contract / liability for payment - Does legal liability for payment rest with XXXXX or with a property owner?
4. Accounting practices - How does XXXXX account for an amount paid? How do they treat that amount for income tax purposes?
5. Best efforts - Does XXXXX undertake to use its best efforts for a property owner rather than assume liability to provide a specific supply?
6. Assumption of risk - Does XXXXX assume any risk of loss from a transaction with a third party?
7. Alteration of property acquired - Does XXXXX alter any property acquired?
8. Use of property or service by agent - Does XXXXX either consume or use the supply in providing its services to a property owner?
By examining a particular expense in light of these indicators, one should be able to reach a conclusion as to the capacity in which XXXXX incurred that expense. It must be recognized that this conclusion will generally be reached after applying all the indicators and not on the basis of one indicator. However, the importance of any one indicator will depend on the facts of the specific expense under consideration. I have attached a copy of the draft policy statement on the meaning of agency which provides a more detailed explanation of each indicator. Please note that although the policy proposal has been approved by the Policy Review Committee, this policy statement is in draft form and is subject to change. It is for internal use only.
Unfortunately, as Ken has already discussed with XXXXX , XXXXX has provided insufficient detail on individual expenses incurred by it under Paragraphs 3 and 4 of a standard agreement to reach conclusions as to the capacity in which they have incurred those expenses. However, we provide the following general comments on various groups of expenses.
Employee salaries
XXXXX uses the services provided by its employees to provide its services to the property owners. As noted above, the Department has previously determined that the employees are employees of XXXXX . An analysis of this group of expenses, in light of the eight indicators, supports them being incurred by XXXXX as principal and not as agent of particular property owners.
Property repairs
Any work completed on a particular building belongs to the owner of that building and not to XXXXX . Further, such work is completed for the direct benefit of the property owner. Although XXXXX may be invoiced for a particular supply, the property owner has to pre-approve most major expenses. An analysis of this group of expenses, in light of the eight indicators, does support them generally being incurred by XXXXX as agent for particular property owners.
Electricity, gas, and other services
In examining this group of expenses, it will be particularly important to distinguish between those supplies that are consumed by XXXXX in providing its services to a property owner and those that are for the direct benefit of a particular property owner. The first would likely not be incurred as agent whereas the latter likely would be.
Insurance, mortgage & property tax payments
The following comments are limited to those payments authorized pursuant to paragraph 4b of both standard agreements. XXXXX has indicated that any contracts or agreements negotiated by it pursuant to this paragraph are between a particular property owner and a supplier. In examining these payments, it is necessary to determine if XXXXX has actually incurred an expense for which it is being reimbursed. It is more likely, based on the facts presented, that XXXXX is using a particular owners' money to pay an expense incurred by that particular owner. In other words, XXXXX may be simply distributing the owners' monies and not incurring a particular expense on their behalf.
If you have any questions relating to this matter or require further input, please contact any member of the Application team. Team members are Ken Mathews at 952-9585, Suzanne Leclaire at 954-7931, Sara Nixon at 954-4397 and Lalith Kottachchi at 952-9588.
H. L. Jones
Director
General Applications Division
GST Rulings and Interpretations XXXXX
Attachment
Sign-off: MB
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