11740-4, 11755-11
11755-22, 11735-1 (sn)
TELEPHONE 954-8585
FACSIMILE 990-1233
XXXXX July 1995
Dear XXXXX :
Further to a June 21, 1995 telephone inquiry received from XXXXX of your office and her subsequent submission of certain documentation, the following summarizes our understanding of the application of GST to a grant paid pursuant to an agreement entered into between XXXXX and XXXXX
Background
1. XXXXX has ordered 25 natural gas powered buses to be delivered sometime in the fall of 1995. On March 23, 1994, XXXXX and XXXXX entered into an agreement whereby XXXXX is to provide a grant in the amount of XXXXX maximum, for each new bus purchased by XXXXX . The grant is to be paid by XXXXX on written notice from XXXXX that the first bus has been put into revenue earning service.
2. There is no specific requirement in the agreement that XXXXX make all if its natural gas purchases exclusively from XXXXX . Rather, the wording of the agreement is a requirement that all of the buses be fueled at a refueling facility which has been approved by XXXXX . Paragraph 8 of the agreement also states that XXXXX acknowledges that the grant made by XXXXX is paid, in part, on the understanding that XXXXX will achieve and maintain a minimum annual gas consumption ("AGC") of XXXXX xx of natural gas.
3. During the 10 year term of the agreement, the price to be paid by XXXXX for all natural gas purchased from approved facilities is set out in a Rate Schedule which can be amended at any time by XXXXX . XXXXX has verbally advised that the rate to be paid is the market rate for gas at the time.
4. XXXXX is required to establish and maintain a Grant Repayment Accrual Account ("the account"). At the end of each year of the term, XXXXX will credit XXXXX the sum of XXXXX for each GJ by which XXXXX annual gas purchases fall short of XXXXX . To the extent that XXXXX annual gas purchases exceed XXXXX , XXXXX is credited with the sum of XXXXX per GJ.
5. At the end of the fifth and tenth years of the term, the balance of the account is to be paid out. Although it is not clearly set out as a term of the agreement, XXXXX has provided verbally that its understanding of the terms of the payout of the account is that although an annual adjustment is made to account, neither party has any right to actually be paid any credit balance until the end of the fifth and tenth years of the term.
6. Under no circumstances is XXXXX required to pay to XXXXX any credit balance showing in the account at the end of the fifth and tenth years.
Discussion
Although the amount of money being paid by XXXXX to XXXXX is called a "grant", XXXXX is receiving the money partly as a result of agreeing to purchase all of its natural gas requirements from facilities approved by XXXXX and partly on the understanding that XXXXX will achieve and maintain a minimum AGC of XXXXX . Effectively, XXXXX is being induced to give XXXXX , if not directly, the right of exclusive supply, then indirectly that right, through giving XXXXX the right to control and direct all of XXXXX gas purchases, as well as assurance that XXXXX will purchase a minimum annual amount of gas. The grant being given by XXXXX to XXXXX must therefore be seen as consideration for a taxable supply.
In the case of inducements, tax is generally payable on the date the inducement is paid. In the case of the inducement paid by XXXXX to XXXXX , although the agreement between the two parties is signed on March 23, 1994, XXXXX is not required to pay the inducement until XXXXX provides written advice that the buses have been put into revenue earning service. To date, the buses have not been delivered to XXXXX and no amount of money has been paid by XXXXX . Tax will only become payable on the date on which written notice has been given by XXXXX , as required pursuant to the agreement.
Once the term of the agreement commences, XXXXX is required to pay a certain rate for its purchases of natural gas. On an annual basis, adjustments are made to the debit or credit of XXXXX , depending on the total volume of gas purchases made.
The XXXXX debit and the XXXXX credit to XXXXX could potentially be interpreted as either adjustments to the price previously paid for natural gas or they can be interpreted as being adjustments to the grant given by XXXXX . Given the specific wording of the agreement, it appears to be more appropriate to treat these amounts as adjustments to the amount of the grant paid by XXXXX . Paragraph 8 of the agreement specifically states that the grant is being paid, in part, as a result of the assurance given by XXXXX that a minimum AGC of XXXXX will be maintained. "Accordingly, XXXXX and XXXXX agree that" the Grant Repayment Accrual Account be established and the annual adjustments be calculated and booked. Therefore, it seems that the intent of the parties to the agreement was to annually adjust the amount of the inducement initially paid, to reflect XXXXX compliance with the agreed AGC level of XXXXX
At the end of a particular year of the term of the agreement, if XXXXX has not complied with the minimum AGC, the adjustment calculated and booked to the account will be regarded as a reduction of the consideration paid by XXXXX to induce XXXXX . Given that XXXXX will have collected and remitted tax on the initial amount of the grant received from XXXXX and XXXXX will have recovered the tax paid through an input tax credit claim, the two parties can choose not to adjust the tax otherwise payable by XXXXX with respect to the reduction of consideration paid to XXXXX , or the provisions of subsections 232(2) and 232(3) could be used.
If however, at the end of a particular year of the term of the agreement, XXXXX has purchased more than 90,000 GJ on an annual basis, XXXXX is entitled to a credit of XXXXX per GJ purchased over XXXXX , but only to the extent that the credit offsets the calculation of a shortfall in a previous year. The amount of the credit booked to the account must be regarded as an increase in the amount of the grant paid to XXXXX by XXXXX .
It is anticipated that in years where XXXXX is effectively receiving a reduction in the consideration paid to XXXXX , no adjustment to the tax otherwise payable with respect to the reduction, will be made. However, in years where XXXXX has purchased sufficient amounts of natural gas as to cause an increase in the consideration to be paid by XXXXX , tax must be accounted for at the end of that year. Even though the net balance of the account is not paid out until the end of the fifth and tenth years, the consideration adjustment becomes due on an annual basis pursuant to the provisions of subsection 168(3). Subsection 168(1) states that tax becomes payable on the earlier of the day consideration is paid and the day consideration becomes due. When consideration for a supply becomes due is determined pursuant to subsection 152(1). In the specific circumstances of the credit being given to XXXXX as a result of having purchased more than XXXXX in a particular year, it does not appear from the terms of the agreement that consideration has become due pursuant to subsection 152(1). As a consequence, the provisions of subsection 168(3) will act to cause tax to become payable.
Should you require any further assistance in this matter, contact one of the members of the Application Team in the Tax Provisions Unit. They are: Lalith Kottachchi (613) 952-9588, Ken Mathews (613) 952-9585, Suzanne Leclaire (613) 954-7931, and Sara Nixon (613) 954-4397.
Yours truly,
H.L. Jones
Director
General Applications Division
GST Ruling & Interpretations - XXXXX
Mitch Bloom (signoff)
c.c.: Application Team
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