8 January 1996 GST/HST Interpretation 11640-3[17] - Section 6 of Part V of Schedule VI to the ETA

                                                                        Telephone No.: (613) 957-8224

                                                                        Fax No.: (613) 990-3602

                                                                        File No.: 11640-3(cav)

I refer to a letter dated November 8, 1994, written by XXXXX concerning the interpretation of section 6 of Part V of Schedule VI of the Act to emergency repair services and bad order repair services supplied to a non-resident by a Canadian registrant. This letter has been reviewed and the following comments are provided.

Background

XXXXX

Under the XXXXX rules, minimum requirements for railcars are listed and carriers are not allowed to operate railcars on their lines unless these requirements are met.

XXXXX Rules

Under the XXXXX s rules, a carrier is required to pull off line a railcar if it does not meet XXXXX specifications and repair it at the owner's expense (up to 35 hours of work). Repairs can be made either by the carrier or by a third party depending on the geographical location.

Neither the XXXXX nor the carrier are required to notify the railcar owner that the railcar is being repaired. The railcar owner receives the invoice for the repair and must pay the invoice. An after-the-fact audit is performed to ensure the repairs are valid and to preserve the integrity of the XXXXX rules.

Non-XXXXX Repairs (Bad Order Repairs)

In addition to XXXXX s repairs (as required under the XXXXX's rules), there may be other repairs (referred to as "bad order" repairs) provided to allow the railcar to be reinstated into service. A bad order repair is performed when the lessee of the railcar (not necessarily the carrier) determines the railcar cannot be used because of mechanical malfunction or damage (e.g. a tank car with leaking valves, a hopper car with faulty hatch covers or gates, a boxcar whose door will not open, worn out truck sets (bolster and side frames which attach wheels to the railcar)) even though the railcar may be track-worth by XXXXX[']s standards.

Both XXXXX and bad order repairs are necessary to keep the railcar running on the railroads. Lessees do not pay for railcars not available for service.

Fact Situation

An unregistered non-resident (UNNR) (e.g. Company Z) leases railcars.

For the purposes of this letter, it will be assumed that Company A is not considered to be carrying on business in Canada and is not required to be registered for the purposes of the GST.

Transaction Details

Company A leases the railcars to another URNR (e.g. Company B). The lease is negotiated between Company A and B outside Canada and the railcar(s) is (are) delivered by Company A to Company B outside Canada.

For most its lifetime, the railcar(s) travel(s) in the United States. However, there is occasion whereby the railcar (e.g. a tank car) will enter Canada and travel on rail tracks in Canada.

Interpretation Requested

XXXXX has asked for a number of interpretations relating to the above scenario. I wish, however, to comment only on his request (point 'c') seeking confirmation that XXXXX and bad order repairs would qualify as "emergency repair services".

XXXXX

Tax Service Office's Response

XXXXX responded that the Department's interpretation of the word 'emergency' is 'an unforeseen event or combination of events that calls for immediate action'. (Ref.: GST Memorandum 300-3-5). Accordingly, if the repairs billed by the Canadian rail companies to the non-resident leasing companies are, in fact, emergency repairs, the repairs would be zero-rated under the provisions of section 6 of Part V of Schedule VI of the Act. However, as the repairs indicated (XXXXX and Bad Order repairs) are a result of an on-going inspection process they would most likely not meet the definition of emergency repairs and, therefore, would be subject to GST at 7%. The repairs, in the proper circumstances could be considered emergency repairs but the loss of earning capability or sales because of down time due to making these repairs would not in itself make them emergency repairs.

XXXXX is correct in refuting XXXXX argument that loss of earning capability and cash flow implications are not, in and of themselves, criteria for determining whether the repair service does in fact qualify as an emergency. However, Mr. XXXXX is incorrect in stating that repairs undertaken as a result of an inspection process would not qualify as emergency repairs. What must be addressed are the circumstances surrounding the urgency (i.e., safety implications) of carrying out these repairs.

In this instance, where mechanical malfunctions are detected, under the XXXXX's rules, the railcars are pulled off line and repaired at the owner's expense. Neither the XXXXX nor the carrier are required to notify the railcar owner that the railcar is being repaired. These emergency repairs are necessary to ensure the safety of freight trains. Accordingly, where the railcars do not meet the norms of the XXXXX for safety thereby requiring immediate repair service, such as service would meet the Department's definition of 'emergency repair service' and be zero-rated pursuant to section 6 of Part V of Schedule VI of the Act.

With respect to 'bad order' repairs, where such repairs are of an urgent nature in that if they are not immediately undertaken they could affect the safety of rail transportation, these services would be zero-rated pursuant to section 6 of Part V of Schedule VI of the Act. The application of this section to 'bad order' repairs would depend on the facts associated with each situation. However, on-going maintenance and upkeep that would reasonably allow a railcar to continue its journey in Canada would not be considered an emergency and would therefore not meet the requirements of section 6.

Please arrange to have XXXXX inform XXXXX that the repair services to railcars carried out as a result of not meeting ATT specifications qualify as emergency repair services under section 6 of Part V of Schedule VI to the Act. With respect to 'bad order' repairs, however, it is a question of fact (i.e., implications of safety and urgency) whether these repairs meet the Department's definition of 'emergency' as set out in GST Memorandum 300-3-5.

A policy paper is presently being prepared to clarify the application of section 6. In the mean time, should you require further clarification, please do not hesitate to contact Carol Ann Villeneuve at (613) 957-8224 or Randy Nanner at (613) 952-8810.

H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
Policy and Legislation Branch

GAD No.: 2646