File: 11650-1, 11667-1 (rw)
Ss. 123(1) "recipient"
XXXXX July 1995
Dear XXXXX
We are replying to your letter of November 22, 1994, in which you ask us to seek a legal opinion concerning certain issues which arise out of a series of requests for application rulings in regards to XXXXX and the XXXXX . We regret the delay in our response.
The comments which follow have been approved by our Legal Services. In addition, although the comments relate specifically to application ruling request 1 ("ARR 1"), they may also be applicable to the other ruling requests which raise similar issues.
A. SUMMARY OF FACTS
Based on the documentation provided, we understand the facts to be as follows:
1. XXXXX operates a straddle plant located near XXXXX , XXXXX which is designed to extract from XXXXX .
2. XXXXX has entered into a series of agreements (the "Extraction Agreements") with various gas shippers/sellers (collectively, the "Shippers" or, individually, "Shipper") whereby XXXXX is entitled to extract and take title to XXXXX and XXXXX from the Shippers' gas streams which pass through the straddle plant.
3. The extraction of XXXXX results in heat content being removed from the gas streams. In addition, the heat content of a Shipper's gas stream is diminished during the extraction process as a result of gas feedstock being used or lost in the course of the operation of the straddle plant (the XXXXX). The reduction in the heating value of a gas stream due to extracted XXXXX as well as XXXXX is referred to as "shrinkage".
4. For the purposes of the Extraction Agreements, shrinkage is divided into two components: the aggregate of the heat content of the extracted XXXXX attributable to the extraction of the XXXXX , and the aggregate of the heat content of the extracted XXXXX attributable to the extraction of the XXXXX
5. XXXXX is obligated to compensate each Shipper for the shrinkage in its gas stream. The compensation may be by way of XXXXX paying a Shipper for providing an amount of "make-up gas" from its gas stream with a heating value equal to the heating value of the XXXXX or the XXXXX XXXXX , or both, as the case may be. Shippers are contractually obligated to provide to XXXXX the required amount of make-up gas.
6. Alternatively, if the parties are unable to agree on the price of the make-up gas, XXXXX has the right to compensate the Shipper by obtaining, presumably from another source, the required amount of make-up gas and delivering it into the Shipper's gas stream. In the event that XXXXX elects not to obtain the necessary amount of make-up gas from a third party, the Shipper will continue to be obligated to supply the make-up gas and XXXXX will be liable to pay a specified price for it.
7. In return for the payment of an annual fee of XXXXX by XXXXX , XXXXX has agreed to ensure that any Extraction Agreements between itself and the Shippers will allow XXXXX to assume all of XXXXX rights to negotiate the pricing of any make-up gas required, or to otherwise deal directly with the Shippers in respect of XXXXX
8. Consequently, XXXXX reads, in part, as follows:
XXXXX
b. in the case of assumption by XXXXX , XXXXX shall be deemed to have assumed XXXXX rights and obligations under Section 4.5 and second sentence of Section 4.2;
c. XXXXX shall be relieved of any liability to Seller for the obligations assumed by [...] XXXXX [...] Section 4.5 is the provision which allows XXXXX to obtain the make-up gas from an alternate source as described above. The second sentence of section 4.2 contains the basic obligation of XXXXX to compensate the Shipper for XXXXX .
9. While a contractual relationship exists between XXXXX and XXXXX whereby XXXXX agrees to sell to XXXXX any XXXXX it extracts through its XXXXX , XXXXX is not a signatory to the Extraction Agreements.
10. XXXXX served notice to the Shippers that, effective May 1, 1994, XXXXX would be assuming XXXXX s obligations with respect to XXXXX Consequently, XXXXX has been dealing directly with each Shipper and either paying each Shipper an agreed upon price for the XXXXX or supplying such Shipper with make-up gas.
11. We assume that there are no factors or contractual terms, express or implied, other than those contained in the written Extraction Agreements, and that there are no understandings or collateral agreements between XXXXX and the Shippers, which affect the extent to which XXXXX is relieved from liability under paragraph 4.7(c) of the Extraction Agreements. In particular, we assume that there are no terms, understandings or agreements between XXXXX and the Shippers which would cause XXXXX to become liable to the Shippers in the event of default by XXXXX of the obligations assumed by it in accordance with section 4.7 of the Extraction Agreements.
12. Under the Extraction Agreements, XXXXX may allow XXXXX rights and obligations with respect to, and compensation for, XXXXX Shrinkage in a manner similar to that of XXXXX However, ARR 1 does not address the possible liability of XXXXX since that is the subject of a separate ruling request.
B. ISSUES
Of the twelve individual rulings requested in ARR 1, six of them concern the application of subsection 153(3) of the Excise Tax Act (the "ETA") to barters of shrinkage for make-up gas. As you have not requested our input with respect to these rulings, we have not engaged in any detailed analysis of the issues raised by them.
All of the remaining rulings requests seek to confirm that XXXXX is the person liable to pay or remit GST in relation to the supplies of shrinkage and/or make-up gas unless notification is given to a Shipper in accordance with section 4.7 of the Extraction Agreement, in which case XXXXX becomes the person liable. The determination of who is liable is significant primarily for compliance reasons, particularly if subsection 153(3) is not applicable.
C. Analysis
With respect to shrinkage, it is important to first identify what it is that is being supplied. This is because shrinkage is merely a term which describes the decrease in the heating value of the gas stream. In our view, a supply of "shrinkage" is the provision by a Shipper of either the right to extract certain products from the gas stream or the products themselves, and either the right to consume a portion of the gas stream or the gas itself. Furthermore, it is our opinion that these properties are provided to XXXXX since it is XXXXX who extracts the XXXXX and then subsequently supplies it to XXXXX even though XXXXX may have assumed the rights and obligations as provided for in the Extraction Agreement. Nevertheless, given the definition of recipient, there remains the issue of whether it is XXXXX that is properly regarded as the recipient and, as a result, would have the obligation to pay tax on the supply.
Because the question of who is the recipient depends on who has liability for payment of the consideration, the issue of novation has been raised. However, for the reasons which are discussed below, we have determined that XXXXX could be liable even in the absence of novation. Consequently, we have not found it necessary to consider the novation argument.
In contrast with the supply of shrinkage, where make-up gas is provided to a Shipper, the question is who, as the supplier, is liable to collect and account for tax on the supply (assuming that subsection 153(3) is not applicable).
We will examine these two issues separately.
1. Supply of Shrinkage
a) XXXXX XXXXX
Where XXXXX has not assumed XXXXX 's rights and obligations under section 4.7 of the Extraction Agreement, XXXXX , being the party liable to compensate the Shipper, is the recipient of the XXXXX XXXXX .
The situation is less straightforward where, presumably under the direction of XXXXX has exercised its right under section 4.7 of the Extraction Agreement and notified a Shipper that XXXXX will assume XXXXX rights and obligations. As mentioned above, it is our view that the XXXXX XXXXX has been provided to XXXXX since it is the person that is engaged in the extraction activities and the operation of the straddle plant. However, under the ETA, the person to whom property or a service is provided is not necessarily the person who has the liability to pay GST. Pursuant to subsection 165(1), this liability rests with the recipient of the supply.
Subsection 123(1) of the ETA defines recipient as follows:
"recipient" of a supply of property or a service means
(a) where consideration for the supply is payable under an agreement for the supply, the person who is liable under the agreement to pay that consideration,
(b) where paragraph (a) does not apply and consideration is payable for the supply, the person who is liable to pay that consideration, and
(c) where no consideration is payable for the supply,
(i) in the case of a supply of property by way of sale, the person to whom the property is delivered or made available,
(ii) in the case of a supply of property otherwise than by way of sale, the person to whom possession or use of the property is given or made available, and
(iii) in the case of a supply of a service, the person to whom the service is rendered,
and any reference to a person to whom a supply is made shall be read as a reference to the recipient of the supply;
Given this definition, the only circumstance in which a person becomes the recipient solely on the basis that the person was provided with the property or service is where no consideration is payable for the supply (i.e. paragraph (c) above). Here, consideration is payable for the XXXXX XXXXX , either in cash or make-up gas. Consequently, the person who is liable to pay the consideration for the XXXXX XXXXX under either paragraph (a) or (b) is the person who will also be liable to pay GST.
The Extraction Agreement constitutes an agreement between XXXXX and the Shipper for the supply of the XXXXX . Without an assumption by XXXXX s obligation to compensate the Shipper, XXXXX would be the recipient under paragraph (a) of the definition. However, upon proper notification being given to the Shipper of XXXXX s assumption, XXXXX of the Extraction Agreement operates to relieve XXXXX of, at least, the primary liability for the compensation.
In your letter to us, you have expressed the opinion that XXXXX may be faced with some residual liability to a Shipper in the event of default by XXXXX on the assumed obligations. If there is residual liability, it appears to raise a number of difficult issues. First, it brings into question the proper interpretation of the definition of recipient. For example, would any such residual liability fall within the scope of the liability contemplated by paragraphs (a) and (b) of the definition? If it is determined that a person having such a residual liability is a recipient, is the person who has the primary liability XXXXX also a recipient? Does the answer to the previous question change if, as may be the case here, the liability of the person who is primarily liable does not arise under the agreement for the supply such that paragraph (a) does not apply to the person? In addition, if XXXXX is faced with residual liability, the issue of novation would have to be considered.
Does XXXX have residual liability? XXXXX of the Extraction Agreement states that " XXXXX shall be relieved of any liability to Seller for the obligations assumed by [...] XXXXX [...]". Given this express contractual term, we do not have, in our view, the facts necessary to support the position that XXXXX has any residual liability with respect to those obligations assumed by XXXXX . In order for the Shipper to have recourse against XXXXX in the event of default of XXXXX , it must be demonstrated that there are implied terms to the Extraction Agreement which were agreed to by the parties and which were not contained in the written agreement. There do not appear to be any facts which indicate that there may be understandings between the parties beyond those expressed in the Extraction Agreement. Furthermore, we understand that the solicitor for XXXXX has represented to you that there is no residual liability imposed on XXXXX . For these reasons, there does not appear to be a sufficient basis for the Department to assert that XXXXX has such liability. Consequently, the questions raised by the issue of residual liability need not be addressed here. However, in order to clearly set out the limits of any ruling issued to XXXXX , we suggest that you include in the ruling an assumption of fact similar to that in paragraph 11 in the Summary of Facts above.
Turning to the question of whether XXXXX is the recipient, we need to examine the basis upon which XXXXX may become liable for paying the consideration for any supplies of shrinkage. In those situations where, pursuant to XXXXX of the Extraction Agreement, XXXXX and a Shipper are able to agree on the amount to be paid in satisfaction of XXXXX assumed obligation under the second sentence of XXXXX , it is likely that the agreement is a contract in its own right and which is enforceable by the Shipper against XXXXX . On this basis, XXXXX would be considered the recipient.
Where XXXXX and a Shipper are unable to agree on the amount to be paid and XXXXX either chooses to deliver make-up gas obtained from a third party source or to pay the specified price in accordance with XXXXX of the Extraction Agreement, and provided that XXXXX has indicated to the Shipper that it intends to perform one of these options, it is likely that the obligations assumed by XXXXX will again be enforceable by the Shipper. In other words, it is our view that there is, in law, a sufficient basis to find XXXXX liable to compensate the Shipper for the shrinkage. Therefore, in these circumstances, XXXXX can be regarded as the recipient of the supply.
We wish to note that there is some question as to whether XXXXX liability arises out of paragraph (a) or (b) in the definition of recipient; in other words, it is not clear whether XXXXX liability arises under the Extraction Agreement. However, on the facts of this case, it does not appear that anything turns on this point. We mention it here only for the sake of completeness, and because you may find it useful in your own analysis.
b) XXXXX Shrinkage
Under the Extraction Agreements, XXXXX may permit XXXXX , not XXXXX , to assume the rights and obligations related to XXXXX XXXXX . Consequently, it would not be possible for XXXXX to become the recipient of the supply of XXXXX XXXXX . This means that XXXXX is the recipient, unless XXXXX has assumed the obligation to compensate the Shipper(s) for the XXXXX XXXXX . We have not considered whether this has occurred since this is beyond the scope of ARR 1.
2. Supply of Make-Up Gas
Where XXXXX has not assumed XXXXX rights and obligations, any delivery of make-up gas by XXXXX is a supply made by XXXXX and it should collect tax from the Shipper, assuming subsection 153(3) is not applicable.
If XXXXX provides the make-up gas to a Shipper in fulfillment of obligations it has assumed in accordance with the Extraction Agreement, it is the supplier and should charge and account for tax, assuming that subsection 153(3) does not apply.
We trust that you have found our comments helpful. If you have any further questions concerning this matter, please contact Sherry Moran at (613) 952-8807 or Robert Wong at (613) 952-9577.
Yours truly,
H.L. Jones
Director
General Applications Division
XXXXX
| c.c.: |
M. Bloom
S. Moran
C. Robertson
S. Marr
R. Wong |
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