Ss. 7 and 23 /V/VI
XXXXX October 26, 1995
I refer to the Memorandum and attachments dated August 1, 1995, sent by XXXXX to XXXXX of my staff, requesting a review of his proposed ruling in connection with the supply of certain legal services made by XXXXX to XXXXX of XXXXX who at the time was an unregistered non-resident (effective November 1, 1993, XXXXX became a GST registrant). The proposed ruling reverses a previous ruling on the same issue, dated July 24, 1992.
May I point out at this time that XXXXX does not appear to be requesting a ruling but rather a GST rebate on behalf of XXXXX and authorization to grant XXXXX an adjustment of the GST that it paid on the acquisition of the legal services rendered by XXXXX
Although I am providing the following comments in respect of the application of the GST legislation to the supply of legal and professional services, I do so with the intent of substantiating that both the GST rebate and the tax adjustment are applicable.
The supplies of the legal services, as I understand them, are outlined under fact number 12 of the statement of facts, and more particularly under item 12(d), which is reproduced as follows:
(d) Corporate and commercial services in respect of the restructuring of the arrangements by which XXXXX obtained gas from Canada.
The overall supply of the above legal services were rendered to XXXXX by XXXXX effective October 1, 1991, and by XXXXX effective December 1992, as a result of the XXXXX XXXXX (Commission) imposing on XXXXX an obligation to reduce the purchase of natural gas from XXXXX supply pool. Therefore, sections 7 ( as it read prior to June 10, 1993) and 23 (thereupon) of Part V of Schedule VI may apply.
The proposed positive ruling, as mentioned above, reverses a previous negative ruling issued to XXXXX on July 24, 1992, which in itself reverses an earlier positive ruling dated June 19, 1992, issued to XXXXX on the same issue. In effect, the proposed ruling to XXXXX confirms, positively, that which was issued to XXXXX on June 19, 1992.
In addition XXXXX is requesting on the one hand a GST rebate on behalf of XXXXX in the amount of $ XXXXX , in respect of the GST that XXXXX paid on the acquisition of certain legal services rendered by XXXXX from October 1, 1991 to December 1992. Furthermore, XXXXX is requesting authorization to grant an adjustment in the amount of $ XXXXX to XXXXX for legal services it rendered from march 1993 to November 1, 1993.
Analysis:
In reviewing the above fact and the additional information at hand, I believe, at first glance, that the zero-rating provisions included in former section 7 and section 23 of Part V of Schedule VI to the Act, may apply as follows:
Generally, the supply of the legal services (e.g. professional services) rendered prior to June 10, 1993, under 12(d), corporate and commercial services, are clearly not in respect to tangible personal property situated or ordinarily situated in Canada or that is to be delivered in Canada, under former paragraphs 7(c) of Part V of Schedule VI. Should the same legal services have been rendered on or after June 10, 1993, one should look towards section 23 of Part V of Schedule VI to zero-rate such a supply. Accordingly, services rendered under item 12(d) are not in respect to tangible personal property that is situated in Canada at the time the service is performed (e.g. paragraph 23(c)). The following is my rationale:
• Under Item 12(a), the civil litigation services appear to be in respect of alleged defaults pursuant to the long-term supply contracts entered into between XXXXX and the Producers ( XXXXX gas producers).
• XXXXX a wholly owned subsidiary of XXXXX purchases natural gas (tangible personal property) from the Producers while XXXXX in turn, also a wholly owned subsidiary of XXXXX carries over its pipeline system to XXXXX natural gas it purchases from XXXXX
• The Producers sought a block action against XXXXX and its related companies for breach of contracts (i.e., to purchase from the Producers minimum annual quantities of natural gas over extended periods corresponding to the life of the Producers' gas fields). XXXXX was forced to terminate the contracts following a decision by the Commission. It can be said that the object and purpose of the supply of the legal services is to litigate the obligations that XXXXX et al. are responsible for, under contract law, and mitigate the damages claimed by the Producers.
• As a result of the above, XXXXX et al. entered into decontracting agreements (DAs) with each of the Producers.
• Although there is a functional relationship between the supply of the legal services and the tangible personal property (e.g., natural gas, shares, etc.), the functional relationship is indirect, in that the purpose of the supply is more in relation to XXXXX et al. liability arising from their failure to honour the contracts entered into with the Producers.
• The supply of the administrative litigation services rendered on behalf of XXXXX et al. before the National Energy Board (the Board) appear to be in respect of seeking the Board's approval, under the National Energy Board Act, concerning XXXXX intention to assign its natural gas transportation rights on XXXXX pipeline system in accordance with the terms and conditions of the XXXXX
• The Board's approval was "sine qua non" in implementing the XXXXX as without it the XXXXX could not take effect. Therefore, the functional relationship between the supply of the legal services rendered before the Board and the tangible personal property is remote.
• The supply of professional services made by XXXXX in respect of the proposed sale of shares by XXXXX and by XXXXX both situated in the U.S., is not is respect of tangible personal property that is situated in Canada or that is to be delivered in Canada, under former paragraph 7(c) of part V of Schedule VI. The above supply is also not in respect of tangible personal property that is situated in Canada at the time the service is performed.
• The shares owned by XXXXX and XXXXX both unregistered non-residents at the time, were those of XXXXX and XXXXX respectively; XXXXX was a wholly-owned subsidiary of XXXXX and XXXXX owned a XXXXX % share of XXXXX
• It appears that the supply of the services are in respect of the proposed sale of the shares and not in respect to the shares themselves. Both XXXXX are not stock brokers and are not licensed to effect the sale of any shares. The supply of the professional services rendered (corporate and commercial) may be in the nature and type of general counsel, albeit more in an advisory capacity, such as advising the non-resident corporations on taxation matters, etc., concerning the sale of Canadian shares by non-residents.
• The corporate and commercial services rendered under item 12(d) concerning the restructuring of the arrangements by which XXXXX obtained gas from Canada, was the result of the decision of the Commission imposing upon XXXXX an obligation to terminate the contracts.
• According to the information at hand, XXXXX may have provided general legal counsel services, described under item 12(d) as corporate and commercial, such as reviewing jurisprudence, researching taxation and GST legislation, preparing new contracts and agreements, etc., in respect of restructuring the previous arrangements. Although the general legal counsel services were designed, developed or undertaken to fulfil or serve a requirement relating to the natural gas (i.e., a functional relationship), the connection between the services and the property is indirect. Therefore, the services supplied by XXXXX and XXXXX are not in respect of tangible personal property, in this case natural gas, as the object of the services is the restructuring of the arrangements not the tangible personal property by itself.
Please refer to Policy Statement P-169 in respect of the above analysis.
CONCLUSION
As mentioned earlier, it appears that the legal services rendered overall were the result of XXXXX having to terminate the contracts. All of the services were rendered at the time to an unregistered non-resident. None of the service rendered were in respect to tangible personal property, as I discussed above. Therefore, I agree that former section 7 and section 23 of part V of Schedule VI to the Act apply to zero-rate the said legal and professional services renderd by XXXXX and XXXXX
However, I believe that your proposed response to XXXXX should not take the form of a GST ruling, as none was requested. It would be more appropriate to inform XXXXX that the June 19, 1992 ruling stands and to confirm with XXXXX that the tax adjustment applies under the circumstances.
You should also inform the Rebate Section that the tax, in respect of the acquisition by XXXXX of the legal services rendered by XXXXX , was paid in error. There upon, it will be up to Audit or the Rebate Section to determine the amount of the rebate payable and whether all of the conditions of section 261 have been met.
H.L. Jones
Director
General Application Division
GST Rulings and Interpretations
Policy and Legislation Branch
GAD: 1390 (REG) XXXXX
| c.c.: |
R. Nanner XXXXX
D. Chamaillard XXXXX |
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