September 22, 1995
11846-1(LFR)
XXXXX
Dear XXXXX
We are writing in response to XXXXX memorandum of July 5, 1994 to Mr. J.A. Venne, Director, GST Rulings and Interpretations.
In his memorandum XXXXX asked for our interpretation concerning the status of two fees imposed under The Vegetable Marketing Development Plan Regulations (Regulations) by the XXXXX Attached to his correspondence was a letter received by your office from XXXXX a copy of the Regulations and various Orders in Council made pursuant to The Natural Products Marketing Act and the Regulations.
Based upon the facts presented in his memorandum and an analysis of same, it is XXXXX opinion that both the membership fee and check-off fee collected by XXXXX are consideration for the supply of a membership made by XXXXX In order to respond to XXXXX request for our comments, we compiled the following statement of facts. Many of these facts are drawn from XXXXX incoming request to us, while others are additional facts taken from the information provided. New facts have also been added and are based upon the information relayed to us via facsimile transmission by XXXXX on August 14, 1995.
Please note that as a result of a request made by XXXXX to Lynn Renner during their telephone conversation of August 14, 1995, we have also addressed XXXXX entitlement to recover tax with respect to its collection of the two fees imposed under the Regulations.
In addition, XXXXX indicated that if it is our view that check-off fees collected by XXXXX pursuant to the Regulations are not part of the consideration for the supply of its memberships, he would like us to explain the difference between the treatment of these fees and the check-off fees collected by the XXXXX . In our letter dated June 16, 1994 to the XXXXX Tax Services Office we indicated that check-off fees collected by XXXXX are consideration for the supply of its membership. In that particular case, a producer of canola was deemed to be registered for purposes of the XXXXX upon deduction of the check-off fees by the buyer of canola. At the time when the deduction is made, the producer is entitled to a right for services, similar to those enumerated under section 17 of Part VI of Schedule V to the Excise Tax Act (ETA). As you will see from the analysis we have prepared with respect to your particular case, the status of a "check-off fee" for GST purposes is dependent upon the legislation under which the fee is imposed and therefore may differ.
Statement of Facts
1. Pursuant to sections 11.14 and 31 of The Natural Products Marketing Act (NPMA), and by means of an Order in Council 590/88 dated July 8, 1988, The Vegetable Marketing and Development Plan Regulations (Regulations) were made. Under subsection 3(1) of the Regulations, The XXXXX was continued as the XXXXX
2. Under subsection 7(1) of the Regulations, the XXXXX (Board) was established. The Board is registered for GST purposes XXXXX Although we have not seen documentation indicating when this change occurred, the Board changed its name to XXXXX . XXXXX is a non-profit organization governed by the Agri-Food Council of the Department of XXXXX Agriculture And Food.
3. Subsection 4 of the Regulations states that "the vegetable plan and orders of the board made pursuant to the vegetable plan apply to ... all producers ...". "Producer" is defined in subsection 2(1) of the Regulations as meaning:
"(i) a person who operates a farm in XXXXX and who is engaged in the production and marketing of vegetables, and includes the employer of any such person;
(ii) a person who is entitled under any lease or agreement to a share of the vegetables produced by a person mentioned in subclause (i) or the proceeds from the sale of those vegetables; or
(iii) a person who takes possession of any vegetables pursuant to any form of security or legal proceeding for a debt ..."
4. Subsection 6(1) of the Regulations states that the "general purpose and intent of the vegetable plan is to provide for the orderly and effective development of the XXXXX vegetable industry." The specific purposes of the vegetable plan are described under subsection 6(2) of the Regulations and includes the promotion and development of the vegetable industry in XXXXX
5. Under section 8 of the Regulations the Board is vested with the power "(c) to require any or all persons engaged in the production or marketing of vegetables to register with the board ...( d) to fix and collect charges for services rendered by the board ..." and "(f) to use in carrying out the purposes of the vegetable plan and paying the expenses of the board any moneys received by the board ..."
REGISTRATION FEES
6. Subsection 16(1) of the Regulations indicates that "Every producer engaged in the production and marketing of $10,000 or more of vegetables in the previous fiscal year shall register with the board ..."
7. Subsection 16(2) of the Regulations entitles any producer with two acres or more of vegetable crops to register with the board. Article 16(4) of the Regulations states that the "board shall remove from the register of producers ... the name of any producer who ceases to have two or more acres of vegetables for a period of two consecutive fiscal years."
8. Subsection 17(1) of the Regulations stipulates that "Every registered producer shall pay a registration fee of $ XXXXX annually at the time and in the manner required by the board."
Although we have seen no documentation evidencing this change, it is our understanding that the registration fee was increased to $ XXXXX annually.
9. Subsection 17(2) of the Regulations states that "Each producer's registration fee for any fiscal year is reduced by the lesser of:
(a) $ XXXXX ; or
(b) the total of the check-off fees paid by the producer pursuant to section 19 in the previous fiscal year."
It is our understanding that the $ XXXXX referred to in clause 17(2)(a) above was increased to $ XXXXX , although we have not seen documentation reflecting this change.
10. Order in Council No. 1/89 entitled "Producer Registration" was made pursuant to the Plan and the XXXXX Article 1 of Order No. 1/89 states that "Each producer shall register with the board by remitting his registration fee no later than sixty (60) days after this order comes into effect ..." The order is effective September 20, 1989.
11. Article 1 of Order No. 1/89 states that "Every producer shall renew his registration by remitting outstanding registration fees no later than sixty (60) days after the calendar year during which he markets his first vegetables ..."
12. Every registered producer is eligible to hold office of the XXXXX attend an annual general meeting and to vote for any purpose under the Plan.
13. On an inconsistent basis, XXXXX has been collecting GST on its registration fees collected under subsection 17(1) of the Regulations since its registration for GST on January 1, 1991. It has not been collecting GST on check-off fees collected under subsections 19(1) of the Regulations. XXXXX has filed an election under section 17 of Part VI of Schedule V to the ETA to make check-off fees taxable. XXXXX has periodically claimed input tax credits in respect of its purchases.
CHECK-OFF FEES
14. Subsection 19(1) of the Regulations states that "Every producer who markets $10,000 or more of vegetables in a fiscal year shall pay check-off fees to the board in an amount equal to the specified percentage of the producer's gross sales of vegetables ..."
15. Subsection 19(2) of the Regulations states that the "Check-off fees shall not exceed 2.5% of the value of the vegetables marketed."
16. Order No. 6/94 entitled "Check-off Collection" was made pursuant to the Regulations and The Agri-Food Act and is effective July 15, 1994. Article 2(ii) of this order states that "Each producer of vegetables shall be required to pay the Board a check-off of 2.5% of the average bulk price for the specified grade of vegetables sold ..."
17. Article 3 of Order No. 6/94 states that
"(i) XXXXX producers shall use an invoice authorized by the Board showing the date, the producer's name, mailing address, and the amount type (grade) and value of the vegetables purchased.
(ii) Each buyer of vegetables shall send one copy of the invoice used to purchase vegetables from each XXXXX producer ...
(iii) All proceeds owing to each producer shall be forwarded to the Board according to the terms and conditions set down on the invoice ...
(iv) No later than two business days following the receipt of the proceeds from the sale of each producer's vegetables, the Board shall deduct an amount of check-off equal to the amount payable as stipulated in section 2 of this order, and forward the balance of collected proceeds to the producer."
18. A sample of the invoice authorized by XXXXX and used by producers on the sale of vegetables to buyers was submitted for review. The check-off fee is not identified on the invoice.
19. Effective June 22, 1995, the payment of check-off fees by producers to XXXXX is no longer required. Rather, every producer of vegetables is required to register with XXXXX and pay XXXXX per year per acre of vegetables. The payment of this new fee to XXXXX replaces the XXXXX registration fee previously collected by XXXXX pursuant to subsection 17(1) of the Regulations. It is not certain whether the requirement to register applies to every producer or only those who produce or market $10,000 or more of vegetables in a fiscal year. No documentation regarding this change was submitted for our review.
OPINION RequestED
1. Are the registration fees paid or payable by producers of vegetables to XXXXX pursuant to subsection 17(1) of the Regulations and Order No. 1/89 consideration for the supply of a membership made by XXXXX
2. What is the tax status of the registration fees, if found to be consideration for the supply of a membership?
3. Are the registration fees which became effective June 22, 1995 that are paid or payable by producers of vegetables to XXXXX consideration for the supply of a membership made by XXXXX
4. Are the check-off fees paid or payable by producers of vegetables to XXXXX pursuant to subsection 19(1) of the Regulations and Order No. 6/94 consideration for the supply of a membership made by XXXXX
5. To what extent is XXXXX entitled to GST relief on purchases related to its collection of registration and check-off fees under the Regulations?
OPINION GIVEN
1. It is our opinion that the registration fees paid or payable by producers of vegetables to XXXXX pursuant to subsection 17(1) of the Regulations and Order No. 1/89 are consideration for the supply of a membership.
2. It is our opinion that if all or substantially all of the memberships supplied by XXXXX are made for no consideration, the supply of all of the memberships will be exempt pursuant to section 10 of Part VI of Schedule V to the ETA, whether or not consideration is paid.
If the exempting provision of section 10 of Part VI of Schedule V to the ETA does not apply, the memberships supplied by XXXXX will be exempt pursuant to section 17 of Part VI of Schedule V to the ETA, unless XXXXX elects, under that section of the ETA, to make these memberships taxable.
3. It is our opinion that if the fees charged confer the same rights to members accepted under section 17 of Part VI of Schedule V to the ETA, the registration fees that became effective June 22, 1995 that are paid or payable by producers of vegetables to XXXXX are consideration for the supply of a membership made by XXXXX
4. It is our opinion that check-off fees paid or payable by producers to XXXXX pursuant to subsections 19(1) of the Regulations and Order No. 6/94 are not consideration for a supply.
5. XXXXX is entitled to recover GST it incurs with respect to the provision of its memberships through the input tax credit mechanism if the supply of its memberships are not exempt under section 10 of Part VI of Schedule V to the ETA and an election to tax this supply, pursuant to section 17 of Part VI of Schedule V to the ETA, is in place.
Although check-off fees collected by XXXXX under the Regulations are not consideration for a supply, XXXXX may claim ITCs to the extent that costs incurred in the collection of the check-off fee are related to its provision of taxable supplies (e.g. its memberships) and not for the purpose of making exempt supplies.
Analysis
1. REGISTRATION FEES
Under the Regulations, producers of vegetables are required to register with the XXXXX where they are engaged in the production and marketing of $10,000 or more of vegetables in the previous fiscal year. Registration is mandatory.
Order No. 1/89 requires producers to register by remitting their registration fee to XXXXX no later than 60 days after the effective date of the order, that being September 20, 1989.
"Membership" is defined in subsection 123(1) of the ETA as including "a right granted by a particular person that entitles another person to services that are provided by ... the particular person and that are not available, or are not available to the same extent or for the same fee or charge, to persons to whom such a right has not been granted ..."
A membership fee is consideration for a right to services, whether the right is exercised or not. It is not consideration for a service.
Section 17 of Part VI of Schedule V to the ETA exempts "A supply of a membership in a public sector body ... where each member does not receive a benefit by reason of the membership, other than
(a) an indirect benefit that is intended to accrue to all members collectively,
(b) the right to receive services supplied by the body that are in the nature of investigating, conciliating or settling complaints or disputes involving members,
(c) the right to vote at or participate in meetings,
(d) the right to receive or acquire property or services supplied to the member for consideration that is not part of the consideration for the membership and that is equal to the fair market value of the property or services at the time the supply is made,
(e) the right to receive a discount on the value of the consideration for a supply to be made by the body where the total value of all such discounts to which a member is entitled by reason of the membership is insignificant in relation to the consideration for the membership, or
(f) the right to receive periodic newsletters, reports, or publications
(i) the value of which is insignificant in relation to the consideration for the membership, or
(ii) that provide information on the activities of the body or its financial status, other than newsletters, reports or publications the value of which is insignificant in relation to the consideration for the membership and for which a fee is ordinarily charged by the body to non-members, except where the body has made an election under this section in prescribed form containing prescribed information."
The definition of "public sector body", as found in subsection 123(1) of the ETA, includes a public service body. XXXXX is a non-profit organization and therefore falls within this definition.
The activities of XXXXX are funded through the registration fees collected from producers. XXXXX activities include the promotion and development of the vegetable industry in XXXXX Because of their registration, producers receive certain benefits, including the right to hold office of XXXXX attend meetings and vote for purposes of the Plan. In addition, registered producers receive other indirect benefits as a result of their registration such as XXXXX distribution of marketing information relating to vegetables in XXXXX A producer's registration is effective until the producer ceases to have two or more acres of vegetables for a period of two consecutive years. At that time, XXXXX removes the producer's name from the register of producers or list of producers. Where a producer's name is removed from the register or list of producers, any rights to services afforded to the producer by reason of membership in XXXXX cease to exist. The producer can no longer exercise the right to vote, attend meetings or hold office on XXXXX The benefits accruing to a producer as a result of registration with XXXXX fall within those enumerated under section 17 of Part VI of Schedule V to the ETA.
Based upon the description of benefits conferred to producers in return for payment of the registration fee imposed under subsection 17(1) of the Regulations, it is our opinion that the fee paid or payable by producers is in respect of a supply of membership made by XXXXX
2. TAX STATUS OF REGISTRATION FEES
The annual registration fee collected from producers by XXXXX in respect of its membership is XXXXX reduced by the lesser of XXXXX or the total of check-off fees paid by the producer in the previous fiscal year. Therefore if, for example, a producer pays $350 in check-off fees, the producer's registration fee will be $50. If a producer pays $450 in check-off fees, the producer's registration fee will be $000.
Section 10 of Part VI of Schedule V to the ETA states that "A supply made by a public sector body of any property or service where all or substantially all of the supplies of the property or service by the body are made for no consideration" is exempt. Therefore, if all or substantially all of XXXXX supply of memberships are made for no consideration, all of its supplies of memberships will be exempt pursuant to this provision.
If section 10 of Part VI of Schedule V to the ETA does not apply, the registration fees collected by XXXXX would be in respect of a taxable supply of a membership, if XXXXX elected to treat its memberships as taxable pursuant to section 17 of Part VI of Schedule V to the ETA.
3. REGISTRATION FEES - EFFECTIVE JUNE 22, 1995
Without having reviewed the documentation respecting the implementation of this fee, we cannot provide a definitive response in this regard. However, if the fees charged confer the same rights to registered producers as provided for under number 1 above, it is our opinion that the registration fee of $ xx per acre per year paid or payable by producers of vegetables to XXXXX effective June 22, 1995 is consideration for the supply of a membership made by XXXXX
4. CHECK-OFF FEES
The XXXXX Tax Services Office is of the opinion that the payment of check-off fees to XXXXX by producers forms part of the consideration for the supply of a membership made by XXXXX pursuant to subsection 17(1) of the Regulations. This opinion is based on the fact that both the membership fee and check-off fee are imposed under the same legislation, collected by the same person (i.e. XXXXX and used by XXXXX for the same reason.
In accordance to subsection 19(1) of the Regulations, every producer who markets $10,000 or more of vegetables in a fiscal year is required to pay check-off fees to XXXXX Check-off fees collected by XXXXX may be used by XXXXX for the purpose of promoting and developing XXXXX vegetable industry.
Subsection 19(2) of the Regulations states that the check-off fee "shall not exceed 2.5% of the value of the vegetables marketed."
Subsection 19(3) of the Regulations states that "The board may require any buyer of vegetables to deduct fees on vegetables from any payments made to producers and to forward those fees to the board ..."
Pursuant to Order No. 6/94, check-off fees are now based upon the average bulk price paid to producers for the specific grade of vegetables sold. Check-off fees are payable in one of two ways. Where a producer sells vegetables to a buyer, the buyer is required to forward on to XXXXX a copy of the producer's invoice for the purchase together with all of the proceeds owing to the producer on the sale. Where a producer packs vegetables for resale, the producer-packer can either remit the payment received from the buyer in respect of the sale to XXXXX or the buyer of the vegetables can remit all the proceeds to XXXXX In all cases, XXXXX deducts the required check-off (i.e. 2.5% of the average bulk price for the specified grade of vegetables payable to producers) from the proceeds remitted and forwards the balance to the producer, no later than 2 business days following the receipt, from the buyer, of the producer's proceeds. (A sample of the invoice used by producers on the sale of vegetables to buyers, as authorized by XXXXX for this purpose, does not identify the check-off fee.)
The payment of a registration fee pursuant to subsection 17(1) of the Regulations and Order No. 1/89 entitles a producer to exercise certain rights (e.g. right to vote; etc.). Although the collection of registration fees (pursuant to the subsection 17(1) of the Regulations and Order No. 1/89) and check-off fees (pursuant to subsections 19(1) and 19(2) of the Regulations and Order No. 6/94) are used by XXXXX for the same purpose (i.e. the promotion and development of XXXXX vegetables), there are several indications that the payment of check-off fees is not linked to membership rights afforded by registration with XXXXX Although XXXXX uses the amount of check-off fees deducted to determine the amount of the registration fee, it does not mean that the check-off fee and the registration fee are consideration for the same thing. It is just a method used by XXXXX to determine the value of the consideration for the supply of its membership.
A producer is not required to register until the year following the year in which he/she has marketed or produced $10,000 or more of vegetables. Check-off fees are deducted at the point of sale of the vegetables regardless of whether a producer is registered. Therefore, a producer who is not required to register until the following year as well as producer who has not marketed or produced $10,000 or more of vegetables in a year will have the check-off fee deducted from the sale of vegetables, although the producer with less than $10,000 in sales will be reimbursed by XXXXX for the amount of check-off fees deducted.
The payment of these check-off fees by the producer does not deem the producer to be registered for purposes of subsection 16(1) of the Regulations. No rights in respect of the membership are conferred to the producer upon payment of the check-off fee, even where the check-off fee paid by the producer totals or exceeds XXXXX
As the requirement to register with XXXXX is based upon the value of the production or marketing of vegetables by a producer in the previous fiscal year, a registered producer remains registered for the fiscal year in which he/she registers regardless of whether or not any amount of check-off fees is paid in that fiscal year. Therefore, even where no sales of vegetables are made and no check-off fees are collected, a registered producer would still be entitled to exercise the rights associated with his/her membership in XXXXX during that fiscal year.
Unlike the registration fee, no supply of membership takes place in respect of the payment of the check-off fee by a producer. The producer is not entitled to a right to services in respect of the payment of the check-off fee.
Although the check-off fee is not consideration for membership, we must determine whether it is consideration for any other supply.
The check-off fee is imposed under subsection 19(1) of the Regulations on supplies of vegetables made by a producer. As a result of Order No. 6/94, this fee is deducted by XXXXX from the average bulk price for the specified grade of vegetables paid to the producer.
In order to determine if a supply takes place in respect of the payment of the check-off fee, we looked to the invoice used by producers when making a sale of vegetables to buyers. As indicated earlier, the invoice used by producers is a form authorized by XXXXX The sample invoice provided to us by the XXXXX Tax Services office identifies the quantity, pack, production description, grade, total weight, unit price and amount (price) of the vegetable order. The invoice states that "Payment is due to XXXXX within 30 days from date of delivery." Neither the requirement to pay a check-off fee to XXXXX nor the amount owing to XXXXX as a check-off fee are identified on the invoice.
The value of the vegetables is determined by the producer. At the time of the sale, the check-off fee has not yet been imposed by XXXXX The toal amount billed to and paid by the buyer is consideration for the supply of vegetables.
It is only at the time XXXXX receives the buyer's payment for the vegetables and deducts 2.5% that the check-off fee is imposed on the producer and the value of the fee is known. The payment of the check-off fee to XXXXX does not trigger the provision of a supply by XXXXX to the producer. No specific property or service is provided in respect of the payment made.
As the check-off fee is not consideration for the supply of a membership, XXXXX cannot elect to make the payment of this fee taxable under section 17 of Part VI of Schedule V to the ETA.
4. XXXXX ENTITLEMENT TO TAX RECOVERY
(For ease of reference, the following briefly summarizes information contained in draft policy statement (P-167). Please note that this summary is essentially the same as that which was provided to you in our letter dated June 30, 1995 regarding entitlement to tax recovery by the XXXXX
The draft policy statement (P-167) entitled "Meaning of the First Part of the Definition of Business", indicates that activities carried on by a person can be categorized as either commercial activities, exempt activities or non-commercial/non-exempt activities.
"Commercial activity" is defined in subsection 123(1) of the ETA as
"(a) a business carried on by the person (other than a business carried on by an individual or a partnership, all of the members of which are individuals without a reasonable expectation of profit), except to the extent to which the business involves the making of exempt supplies by the person,
(b) an adventure or concern of the person in the nature of trade (other than an adventure or concern engaged in by an individual or a partnership, all of the members of which are individuals, without a reasonable expectation of profit), except to the extent to which the adventure or concern involves the making of exempt supplies by the person, and
(c) the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply ..."
"Commercial activities" of a person are those activities which fall within paragraphs (a), (b), or (c) of its definition or otherwise deemed to be commercial activities pursuant to some other provision of the ETA.
Exempt activities are those activities associated with the making of supplies listed in Schedule V to the ETA while non-commercial/non-exempt activities are those activities which neither fall within the definition of commercial activity or constitute activities associated in making of supplies included in Schedule V to the ETA.
Persons engaged in exempt, or non-commercial/non-exempt activities are not considered to be engaged in a commercial activity and are not required to charge GST in respect of supplies made in the course of those activities. No input tax credits are available to registrants for tax paid or payable in the course of their exempt or non-commercial/non-exempt activities.
"Business" is defined in subsection 123(1) of the ETA as including "a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment."
Therefore, unless a particular business activity takes place under the conditions comprising an activity that is not a commercial activity (i.e. activities involving the making of exempt supplies, activities engaged in by an individual or partnership composed solely of individuals with no reasonable expectation of profit, or the performance of a duty relating to an office or employment), the business is a commercial activity. Generally, all of the activities undertaken by a person are viewed as being carried out to achieve a single or primary goal.
As such, XXXXX will be considered to be engaged in a commercial activity in respect of all of its activities where it carries on these activities in an organized and structured manner, except to the extent that it is involved in a non-commercial activity.
The activities carried out by XXXXX (i.e. the collection of registration fees and check-off fees) are made in the furtherance of its principal goal of promoting and developing the vegetable industry in XXXXX Hence, all of the activities it carries out would be characterized as being part of that single business activity and therefore are commercial activities.
Section 169 of the ETA provides that a GST registrant is entitled to claim ITCs for GST paid or payable by the person with respect to any property or service acquired or imported by the person to the extent that the property or service is for consumption, use or supply in the course of commercial activities. Further, in accordance with section 141.01 of the ETA, ITCs are available on costs incurred by a business only if, and to the extent that, those costs are for the purpose of making taxable supplies.
Accordingly, XXXXX will be entitled to claim ITCs on costs it incurs in the course of its business activity that are attributable to its making of taxable supplies. Therefore, XXXXX is entitled to claim ITCs for the GST it incurs with respect to its memberships, provided that section 10 of Part VI of Schedule V to the ETA does not apply and XXXXX has elected to make them taxable pursuant to section 17 of Part VI of Schedule V to the ETA. Although check-off fees collected by XXXXX are not consideration for a supply, XXXXX will be able to claim ITCs for the costs incurred in collecting the check off fees to the extent that these costs can be related to the provision of a taxable supply (e.g. taxable memberships).
We hope these comments will be of assistance to you. Should you have any questions, please call me at (613) 954-3551 or Lynn Renner, Policy Officer at (613) 952-9262. Please note that in accordance to draft policy P-167, a copy of your district's GST interpretation or ruling to XXXXX will have to be sent to the General Application Division for review.
Yours truly,
Marilyn Viger
Manager
Governmental Sectors
GST Ruling and Interpretations
| c.c.: |
J.A. Venne
Lynn F. Renner (Doc. 609) |
Email this Content