Dear sir:
This concerns your facsimile message of November 16, 1995, concerning the GST status of supplies of real property, tangible personal property and what is described as "royalties".
Facts
The facts of the case, as supplied in your facsimile message, and as supplied by XXXXX are as follows.
1. The Agreement of Purchase and Sale (the Agreement), dated March 24, 1994, stated that XXXXX supplied real property and equipment to XXXXX[.]
3. The Agreement states that the sale price of the land and equipment is XXXXX. XXXXX indicated that an attached schedule lists the value of the land as XXXXX the immovables as XXXXX and the equipment as XXXXX[.] The equipment consisted of two used caterpillar tractors, a used bulldozer and miscellaneous equipment, which constituted the total equipment used to operate the harbour and dock. XXXXX indicated that, in his view, the XXXXX estimate for the equipment was fairly accurate.
4. The Agreement also states that the purchaser will, on the closing of the transaction, deliver to the vendor a covenant to pay the vendor XXXXX for each gross tonne of goods shipped or received in the operation of the harbour, to a maximum amount of XXXXX payable on the fifteenth of every month.
The Agreement also requires the purchaser to give the vendor a first mortgage on the lands, to secure its obligation to the vendor.
5. Schedule "D" to the agreement consists of a copy of the mortgage registration, pursuant to XXXXX. It indicates that XXXXX has registered a mortgage of XXXXX against the property, with XXXXX listed as the owner of the property.
6. XXXXX and XXXXX are not related companies.
7. Both companies are registrants.
8. The companies have not filed any election pursuant to section 167 of the ETA.
Question
1. Is the sale price of the land and equipment XXXXX or is it XXXXX[.] In other words, is the XXXXX payment for royalties, as indicated on the Agreement, or is it part of the consideration for the supply of land and equipment?
2. If the XXXXX is payment for royalties, what is the tax status of the supply?
Response
Subsection 123(1) of the ETA defines "consideration" as "any amount that is payable for a supply by operation of law". Since the Agreement states that XXXXX will pay XXXXX an amount not to exceed XXXXX secured by a mortgage on the land, it would appear that that additional payment is part of the consideration for the supply of real property and tangible personal property, rather than a royalty payment.
Although the Agreement states that the total amount payable will depend on how many tonnes of goods are shipped through the harbour, it also states that the maximum amount that would be payable on that basis is to be registered as a mortgage, and that amount is in fact registered as a mortgage. That would suggest that the expectation is that sufficient tonnage will be shipped through the harbour to require XXXXX to pay the maximum amount mentioned in the Agreement. It is therefore possible to conclude that the total consideration for the supply is in fact ascertained at the time the supply is made, in the amount of XXXXX[.] If, in the final analysis, it becomes clear that XXXXX will not pay XXXXX all of the mortgage amount because fewer tonnes of goods than expected are subsequently shipped through the harbour, and if part of the mortgage is therefore forgiven by XXXXX the amount of GST payable on the supply can be adjusted pursuant to section 232 of the ETA.
Since no exempting provision applies, the supplies are taxable. Since the Agreement did not state the amount of tax payable or that the amount payable by the recipient in respect of the supply included the tax payable, the question of whether the tax was extra or included is a matter to be determined between the parties.
If you require any further information concerning this matter, please contact Mr. Don Dawson at (613) 952-9211.
J.A. Venne
Director
Special Sectors
GST Rulings and Interpretations
File #11950-1
Ref. ss. 255(2)
Document #1563
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