31 October 1997 GST/HST Interpretation HQR0000145 - System Improvement Reserve Fund

                                                                        GST/HST Rulings and
 Interpretations Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
 XXXXX                                                                                K1A 0L5

Dear XXXXX

Thank you for your letter of January 10, 1996, with attachments, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transactions described below.

Our understanding of the facts, the transactions, and the purpose of the transactions is as follows.

Statement of Facts

1. The Western Grain Transportation Act, RSC, 1985 (Act) is an Act to facilitate the transportation, shipping, and handling of western grain. In June of 1986 and pursuant to the Act, Treasury Board approved a contribution program known as the System Improvement Reserve (SIR).

2. The SIR program was established to fund, for a three year period, innovative alternatives to traditional railway branch line operation. Authority was granted to the Minister of Transport Canada (Minister) to enter into agreements with transportation and grain handling companies to fund projects which were compatible with the objectives of the SIR program. With Treasury Board approval, amendments were made in 1988 and 1990 to the terms and conditions of the SIR program. As a result of these amendments, the duration of the SIR program was extended to the end of 1999. In addition, authority was granted to enable the entering into agreements directly with grain producers for purposes of providing funding under the SIR program.

3. Authority granted to the Minister with respect to the entering into agreements for purposes of the SIR program was passed to the "Administrator" pursuant to subsection 17(4) of the Act. This provision states that "The Administrator, on behalf of the Minister, may enter into agreements to provide for the movement of grain by motor vehicle transport ..." The "Administrator" is the Grain Transportation Agency (GTA). The GTA operates within Transport Canada.

4. For purposes of providing funding under the SIR program, separate System Improvement Agreements (SIA) are entered into between the Minister and companies operating licensed facilities and/or eligible producers. "Licensed facilities" are persons/companies licensed under the Canada Grain Act to operate a grain elevator. Eligible producers are those producers who farmed and delivered grain in the 1986/87 crop year to a point on the line being abandoned or who loaded producers cars on the line in 1986/87.

5. Under the SIAs, both the company operating the licensed facility and eligible producer agree to administer a Producer Trucking Program (PTP). The PTP is a program whereby an eligible producer who delivers grain to a company operating a licensed facility is entitled to be paid the trucking assistance by the company provided that the grain producer has a System Improvement Agreement with the Minister. The Minister reimburses the company operating the licensed facility for all eligible trucking payments it paid to eligible producers.

SIA WITH LICENSED FACILITIES

6. The preamble to the SIA with companies operating licensed facilities (Agreement I) states that the Minister "wishes to provide a contribution to the licensed facility for payment to producers for the movement of certain grain by motor vehicle transport ..."

7. Subsection 2(2) of Agreement I provides that payments made to the licensed facilities will be equal to the lesser of (a) the Agreed Producer Trucking rate for each tonne of Grain that has been delivered by Producer Trucking pursuant to a Producer Trucking Program or (b) the Producer Trucking Costs incurred by the licensed facility.

8. Subsection 2(3) of Agreement I states that payments will be made on the basis of invoices submitted by the licensed facility annually and verified by the Minister, showing costs incurred by the licensed facility through the identification of (a) total tonnage delivered by each eligible producer (b) details of deliveries by each eligible producer in chronological order; and (c) Producer Trucking Costs. The "Producer Trucking Costs" is defined as "the costs of payment to producers for Producer Trucking of Grain, pursuant to the Producer Trucking Program". This definition is restated in SIA with eligible producers.

SIA WITH ELIGIBLE PRODUCERS

9. The preamble to the SIA with eligible producers (Agreement II) states that the Minister "wishes to provide a contribution to the Producer for the movement of certain grain by motor vehicle transport."

10. Subsection 2(2) of Agreement II states that the "the Minister shall pay the Producer a contribution equal to the Producer Trucking Rate for each tonne of grain that has been delivered by the Producer for the purpose of loading a producer car to a maximum of total eligible amount tonnes for producer name and trucking number less the amount of grain moved under the Producer Trucking Program."

11. Subsection 2(3) of Agreement II states that the payments will be made on the basis of invoices submitted by the producer annually and verified by the Minister, showing costs incurred by the producer through the identification of (a) tonnage and types of grain involved in Producer Trucking; (b) point of destination for Producer Trucking activities; and (c) Producer Trucking Costs.

12. The GTA was repealed effective July 31, 1995. The Minister has the authority to enter into agreements for purposes of the SIR program until its operation ceases in 1999.

Ruling Requested

What is the tax status of payments made by the Minister to companies operating licensed facilities under Agreement I and to eligible producers under Agreement II?

Ruling Given

Based on the facts set out above, we rule that the payments made by the Minister to companies operating licensed facilities under Agreement I and to eligible producers under Agreement II are not consideration for a supply and therefore GST does not apply to those payments.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to departmental interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

Under the Department's administrative policy respecting grants and subsidies, a payment made by a person is viewed as not being consideration for a supply where neither the person making the payment or a specified third party receives a supply in return for the payment made.

In the case at hand, the Minister's purpose in making payments to companies operating licensed facilities and producers eligible for funding under the SIR program is not to purchase property or a service for its own use or benefit or that of a specific third party. The payments are made for a public purposes, that being to provide financial assistance to western grain producers to facilitate in the transportation, shipping and handling of western grain adversely affected by the closure of grain dependent branch lines.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-7952.

Yours truly,

Lynn F. Renner
Governments Unit
GST/HST Rulings and Interpretations Directorate

ATIP - Legislative References: Grants & Subsidies Administrative Policy