Domus: 528
File: 11846-3
XXXXX August 17, 1995
Dear XXXXX
This is in reply to your letter of December 2, 1993. You seek clarification of the tax treatment of contribution payments made to private woodlot owners in XXXXX under a joint federal-provincial program. Our comments are set out below.
PREVIOUS RULINGS
A letter dated Sept. 18, 1992, to XXXXX , from J.A. Venne ("the 1992 letter"), indicated that certain payments made under the XXXXX were not consideration for a supply and, therefore, not subject to GST. Another letter dated June 22, 1993, ("the 1993 letter") sent to you from J. A. Venne indicated that other payments made under the same agreement were consideration for a taxable supply and, therefore, were subject to GST.
CLARIFYING RULINGS
A review of the above-mentioned letters indicates each one dealt with different stages in the contribution "chain". The 1992 letter stated that the payments from 1) XXXXX to the XXXXX and 2) from the XXXXX to XXXXX and 3) from XXXXX to woodlot owners are not consideration for a supply and not subject to GST. The 1993 letter stated that payments from 1) a woodlot owner to a private contractor and 2) from XXXXX to a private contractor are consideration for a taxable supply and subject to GST.
At this time, we would advise the tax treatment of the contribution payments are as follows:
1. From XXXXX to the XXXXX = not consideration and, therefore, not subject to GST;
2. From the XXXXX to XXXXX = not consideration and, therefore, not subject to GST;
3. From the XXXXX to woodlot owners = not consideration and, therefore, not subject to GST;
4. From woodlot owners to contractors = consideration for a taxable supply and, therefore, taxable;
5. From the XXXXX to contractors = consideration for a taxable supply and, therefore, taxable.
An analysis of the tax treatment of these contribution payments is set out below.
Analysis
Statement of Facts
1. Financial assistance and technical advice to private woodlot owners is provided under a federal/provincial program, the XXXXX (Agreement I). The purpose of this Agreement is to "enable XXXXX and XXXXX to financially support initiatives in the intensive management of XXXXX forests to increase the sustainable supply of softwood and high quality hardwood timber, thereby improving future wood supply, while encouraging the sustainable development of new income and employment opportunities."
2. Under Agreement I, the XXXXX ("the Program") was developed.
The general objective of this program is to improve economic viability of woodlots through financial support for increased levels of private woodlot forest management, including planning, silviculture, as well as technical, educational and marketing assistance for woodlot development activities.
3. Under the Program, a separate Agreement (Agreement II) has been signed by XXXXX and the XXXXX whereby the XXXXX shall arrange for the implementation of certain woodlot management activities, specifically the development of woodlot management recommendations; administration of financial support for silviculture activities; and the provision of program support, which includes hiring and coordinating of staff for silviculture duties.
4. Under Agreement II, XXXXX provides funding to the XXXXX for the implementation of the Program. Part of the funding received from XXXXX is retained by the XXXXX for its program support activities, that is, hiring and coordinating of staff for silviculture duties. However, the XXXXX is actually delivered through XXXXX and less than 5% is retained by the XXXXX
5. The XXXXX allocates funding to the XXXXX . The XXXXX provide program support, silviculture services, assistance and encouragement of the implementation of the woodlot management recommendations and the provision of financial assistance to woodlot owners. The XXXXX are non-profit organizations.
6. Subsequently, the XXXXX either provide technical advice and financial assistance to a woodlot owner who does his own work or pay a contractor who performs the work on a woodlot owner's property. The assistance usually covers between 50-90% of the cost and the woodlot owner is expected to pay any costs exceeding the assistance rates.
In a telephone conversation of February 13, 1995, between yourself and Pauline Greenblatt of this office, it was noted that where contractors are used, there is a contract between the woodlot owner and the contractor. There is no agreement between the XXXXX and the contractor. Rather, the XXXXX merely have the right to approve the payment for the work, since the woodlot owner has signed a XXXXX (payment form). On the payment form, the woodlot owner lists the work to be done and whether payment is to be made to the woodlot owner or the contractor.
8. Individual woodlot owners, upon application for funds from the XXXXX agree to the following: to have a woodlot management plan completed; to commit their lands to forest production for a specified period of time; to have all work done in accord with federal and provincial criteria and technical guidelines; to allow inspections of the land and audits of costs; to plant and tend agreed upon areas.
9. The application for funds is approved, and the cheques to the owners or contractors are written by the XXXXX
10. Section 27 of Agreement II indicates the payment made from the XXXXX may have to be repayed if the use of the property changes. Section 27 states: "When the use of any property treated under the Agreement is changed within 10 years after such treatment to a use incompatible with the original use, the Federation shall demand repayment of those funds received by that owner from the Agreement, for the treatment in question and remit any such recoveries to XXXXX upon receipt."
Tax Treatment of First Three Payments
Contribution payments are not subject to GST when made from XXXXX to the XXXXX ; from the XXXXX to the XXXXX ; and from the XXXXX to the woodlot owners. These payments meet the criteria set out in the grants and subsidies policy and, as such, are not consideration for a supply. Therefore, they are not subject to GST. This interpretation is consistent with that provided in our letter of 1992 to XXXXX . The grants and subsidies criteria are discussed below.
Section 165 of the ETA requires recipients of taxable supplies to pay tax in respect of the supply equal to 7% of the value of the consideration for that supply. Accordingly, it must be determined if the grant is consideration for any supply which may be provided under the agreement because only when the payment is consideration will GST apply to that payment.
There are several indications that payments made to woodlot owners under the XXXXX are not directly linked to an activity which directly benefits the grantor, whether that person is the federal government, the XXXXX
The payments are made for a public purpose. The purpose of Agreement I between the Federal Government and XXXXX is to "enable Canada and XXXXX to financially support initiatives in the intensive management of XXXXX forests to increase the sustainable supply of softwood and high quality hardwood timber, thereby improving future wood supply, while encouraging the sustainable development of new income and employment opportunities."
The general objective of the XXXXX is to improve the economic viability of woodlots through financial support for increased levels of private woodlot forest management, including planning, sliviculture, as well as technical, educational, and marketing assistance for woodlot development activities.
Through the Program, the XXXXX provide program support, silviculture services, assistance and encouragement of the implementation of woodlot management recommendations, and the provision of financial assistance to woodlot owners.
The XXXXX do not receive these services; rather the woodlot owners receive the benefit of the transfer payments. There is no direct link between the payments and benefits to the XXXXX XXXXX
The payments are made in the public interest. Through Agreement I and the agreement between XXXXX and the XXXXX the economic benefits of financial assistance to woodlots in the region are recognized; and the payments are not made to benefit the governments, the non-profit organizations or the individual woodlot owners. They are made to increase the economic viability of the woodlot industry.
Therefore, these contribution payments are not made in respect of a supply; there is no direct link; and the payments are not consideration. As such, they are not subject to GST.
Tax Treatment - Woodlot Owners to Contractors
The payment from the woodlot owner to a contractor to do work on his woodlot under the Program is consideration for a supply and subject to GST. The owner receives a direct benefit for the payment; he will receive a supply of the contractor's services, such as tree planting, etc. Thus, there is a direct link between the payment and the benefit to the woodlot owner. Again, the payment is consideration for a supply and subject to GST.
Tax Treatment - XXXXX to Contractors
The 1993 letter indicated that, as the XXXXX were the agent of the woodlot owner, when the XXXXX paid the contractor directly, the amount would be taxable. Our current position is that the payment is taxable, but for reasons which do not involve agency. These reasons are discussed below.
The policy paper on agency entitled "Determining the meaning of agent and agency" sets out criteria for determining when an agency relationship exists. (Please note that this paper was not available when the 1993 letter was written.) Reference to the criteria in the paper indicate it is unlikely that agency exists between the XXXXX and the woodlot owner when the XXXXX pay the contractor to do work on the woodlot owner's land. The paper identifies three essential qualities of agency. These are described below, along with reasons for why they are not met here.
1. Consent of both the Principal and Agent
Agency exists where a principal authorizes another person to represent him and to take certain actions on his behalf. The grant of authority by the principal may be express or implied.
In this case, there is no authorization by the woodlot owner for the XXXXX to take any action on the woodlot owner's behalf. The XXXXX just pays the contractor on behalf of the woodlot owner using money to which the woodlot owner is entitled.
2. Authority of the Agent to affect the Principal's Legal Position
This refers to the ability of an agent to bind the principal or to affect the legal position of his principal. The most common example of an agent binding the principal is where the agent is authorized to enter into contracts with third parties on behalf of the principal.
In this case, this is not present. Again, the XXXXX does not enter into an agreement with the contractor, but simply pays the contractor on behalf of the woodlot owner for services using money to which the woodlot owner is entitled.
3. The Principal's control of the Agent's Actions
In a relationship of agency, it should be clear that the principal has a degree of control over the agent's actions. The agent would be acting as an extension of the principal and, therefore, would be under the principal's general direction and control.
Again, this characteristic is not present in this case. The woodlot owner does control the situation in the sense that he authorizes the XXXXX to pay the contractor. However, this control is not sufficient to establish an agency relationship when all three criteria are taken into consideration.
The tax treatment of the payments the XXXXX makes to a contractor must be determined by a closer examination of the facts. The first question in the grants and subsidies policy is whether a supply is provided. In this case, it is clear a supply of silviculture services is made by the contractor.
However, it is not immediately apparent who is the "recipient" of the supply. Again, one must look to the facts of the case to determine this.
When consideration is payable under an agreement, the "recipient" is, by definition, the person who is liable under the agreement to pay the consideration. We have been told that although the XXXXX pays the contractor for services, no agreement exists between these parties. We have also been told that the woodlot owner and the contractor have entered into an agreement for the supply of the contractor's services. Although we have not seen the agreement between the contractor and the woodlot owner, we assume that the owner is liable to pay for the contractor's services.
As the person liable to pay under the agreement, the woodlot owner is the recipient of the supply. As the recipient of taxable services provided by the contractor, the woodlot owner is required to pay GST on those services.
By use of the payment authorization form, the woodlot owner authorizes the grant payment to which he/she is entitled to be paid to the contractor creating a payment arrangement under which the XXXXX pays the contractor on the woodlot owner's behalf. As the XXXXX makes the payment on the woodlot owner's behalf, it cannot be said to be making a grant to the contractor. Section 27 of Agreement II provides further evidence that the supply is to the woodlot owner with the XXXXX merely paying for the supply on the woodlot owners behalf. Section 27 indicates that if the woodlot owner changes the use of the property to non-Program uses, he must repay Program funds. Since the woodlot owner is bound by this obligation [and not the XXXXX or contractor], it is our view that the supply is to the woodlot owner.
We are aware that this issue has been discussed by your office and the XXXXX District Office, specifically by XXXXX . Accordingly, we will send a copy of this letter to the XXXXX District Office.
If you have further questions or comments, please do not hesitate to contact the undersigned at 954-3551 or Pauline Greenblatt, Policy Officer, at 954-5125.
Marilyn Viger
Manager
Governmental Sectors
Special Sectors
GST Rulings and Interpretations
| c.c.: |
J.A. Venne
Marilyn Viger XXXXX
Pauline Greenblatt |
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