XXXXX
XXXXX 11710-1 (gp)
XXXXX HQR0000412
XXXXX S. 182
XXXXX
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Attention: XXXXX
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July 3, 1997
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Subject:
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Tax Status of Out-of-Court Settlement, XXXXX
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This memorandum is in response to your letter of November 6, 1996, requesting our comments on the noted subject.
Statement of Facts
1. XXXXX , a GST registrant, has an underground pipeline in an easement that crosses land currently owned by the XXXXX
2. The land, including the easement, is used by the City as a landfill site.
3. As background to this information, the following is provided:
a) In 19 xx , three private individuals, as executors of an estate, granted an easement to XXXXX for "the laying down, construction, operation, maintenance, inspection, alteration, removal, replacement, reconstruction and/or repair of one or more pipe lines ...". Consideration in the amount of XXXXX was paid. No GST was payable. This easement was registered in 19 XXXXX and title records show subsequent amendments for the changes in names of the parties involved.
b) The City has advised that they acquired title to the land in question from the three private individuals in 19 xx .
c) On February 1, 19 xx , the City wrote to XXXXX to request permission to use the easement land to "... place garbage and refuse on top of the existing ground level over your pipeline, to a depth of approximately fifteen feet ..."
d) In a reply letter of April 3, 19 xx , XXXXX , as the current owner of the pipeline and the party of the easement agreement, granted such permission to the City. Other than to caution the City as to the damage which could result if the underlying pipeline was ruptured by the landfill activities of the City, the reply letter from XXXXX was silent as to what would happen if the City either damaged the pipeline or otherwise violated the permission being given.
e) There is no evidence that any type of consideration was given by XXXXX in exchange for receipt of the permission.
f) Sometime between XXXXX ownership of the pipeline and the easement was transferred from XXXXX
4. Contrary to the letter of permission, the XXXXX buried the underground pipeline in approximately XXXXX of landfill garbage. In a December 1, 1994 letter from XXXXX noted:
"During a recent major inspection of the pipeline, it was observed that significant overburden has been placed over the line within the easement area referenced in the letter heading. At the depths of fill witnessed, reasonable access to the pipeline is no longer feasible and concern is expressed as to the ability to undertake any maintenance or inspection of this section of the line.
In view of the apparent breach of the earlier fill height consent within the easement, it is requested that the City review the extent of overburden on site and advise of any action that will help resolve the issue."
5. In an agreement dated XXXXX (the "Agreement"), XXXXX agreed to relocate the pipeline and the City agreed to provide partial funding to XXXXX for the relocation of the pipeline. The amount to be provided by the City is one-half of the cost of relocation of the pipeline including any applicable sales tax up to a maximum of XXXXX agreed to discharge the easement registered in its name against the land owned by the City.
6. XXXXX has now invoiced the City for the agreed portion of the cost to relocate the pipeline. The invoice includes provincial sales tax but does not include GST. The accompanying letter to the invoice explains that XXXXX has paid the applicable GST due under the contract for the relocation of the pipeline.
7. The City indicates that it is not purchasing the pipeline, nor is it receiving any benefit under the Agreement, for use of the pipeline.
Issue:
The City is requesting a written ruling concerning the application of tax to the payment it has made to XXXXX
Analysis:
This issue can be analysed by answering the following questions:
1. To which transaction does the payment relate?
2. Is that transaction a supply?
3. If it is a supply, is it a taxable supply?
4. If it is a taxable supply, is the payment consideration for that supply? If the payment is not consideration for a taxable supply, does section 182 apply to the transaction?
5. If section 182 does not apply, do the general provisions apply to the transaction?
1. To which transaction does the payment relate?
There are a number of possible transactions to which the payment could relate:
• the granting of the original easement by the estate to XXXXX
• the transfer of the ownership of the land to XXXXX ,
• the transfer of the easement right to the subsequent owners of XXXXX
• the request by the XXXXX for permission to dump garbage on the easement, and the granting of permission to dump garbage from XXXXX , and
• the agreeing to move the pipeline and or the signing of the Agreement.
As background, consider that in subsection 123(1) of the Excise Tax Act (the "ETA"), the term supply is defined as "the provision of property or service in any manner". The term property is defined as being "any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal. and includes a right or interest of any kind, a share and a chose in action, ...". The term taxable supply is defined "as a supply in the course of a commercial activity". Finally, the term commercial activity "of a person means a business carried on by the person ... (paragraph (a) of the definition), an adventure or concern of the person in the nature of trade ... (paragraph (b) of the definition), or the making of a supply by the person of real property ... (paragraph (c) of the definition)".
Analysis of the transactions shows that the payment does not relate to the first three transactions as these transactions relate to the ownership of the easement and as such have no relationship with the use of the easement as a landfill site. The question is to which of the last two transactions does it relate?
The fourth transaction is the XXXXX agreement wherein the City requested permission to dump landfill on the easement land and that request was granted. The final transaction is the XXXXX Agreement. While this Agreement could stand alone on the face of its contents, when viewed in the context of the entire relationship between the two parties, it is arguable that the payment made by the City under the Agreement is similar to a payment of damages for a breach on its part of the original agreement relating to the use of the easement as a landfill site as granted in the fourth transaction. Although the parties do not specifically acknowledge this aspect in the Agreement, it seems reasonable to attribute this motive to the City, since it would seem to be the most plausible reason for the City to have contributed to the relocation costs in respect of a pipeline that it does not own. The City's controller acknowledges this fact in letter to Revenue dated October 23, 1996, in which XXXXX of the Comptroller's department of the City states that: "It is my understanding that the City did not live up to its obligation regarding the easement resulting in the need to relocate the pipeline. I have also been informed by our solicitor's office that XXXXX could have taken us to court to claim full cost recovery for relocating the pipeline. However, we agreed outside court action to pay up to the agreed upon amount." Therefore, it appears that the City is paying the amount, as a consequence of a breach of an agreement for the making of a taxable supply by XXXXX .
For this particular case, therefore, it is necessary to look beyond the immediate circumstances of one transaction, that is, the Agreement, to determine whether there is a link with a previous transaction in order to apply, for example, section 182. Accordingly, the transaction that should be considered is the request from the City to XXXXX for permission to dump garbage on the easement and the granting of permission to the City to dump garbage by XXXXX
2. Is that transaction a supply?
In the transaction between XXXXX and the City, XXXXX is the supplier (of the permission to dump garbage), the City is the recipient. The question is, what is being supplied?
As noted above, a supply is considered to be the provision of property or service in any manner. In this case, the simple question is was there an agreement to confer a benefit (in the form of either property or a service) from one person to another. In this case the City requested, and was granted, permission from the antecedent company of XXXXX to dump garbage on the easement land. Although there was no payment for the granting of this permission, it is reasonable to conclude that the City sees a benefit arising from the request otherwise the City would not have requested the permission. Accordingly, there has been a supply of a right to dump garbage on the easement.
3. If it is a supply, is it a taxable supply?
Since it has been determined that there is a supply, the question is now whether the supply is a taxable supply. At this point, the question could be that since the transaction occurred prior to the implementation of the GST, the taxable status is not relevant. However, the analysis of the transactions has been to determine whether section 182, or the general provisions, apply to a payment made after the implementation of the GST. If the payment does not relate to a "taxable" supply, then section 182 cannot apply regardless of whether the transaction was made before or after the implementation of the GST.
As noted above, a taxable supply is a supply in the course of a commercial activity. In this case, the supply was made in the course of the commercial activities of XXXXX the antecedent company to XXXXX Although there was no payment between the parties, and XXXXX does not usually deal with the provision of supplies of permission to dump garbage, it can be viewed that this transaction was one made in the course of the commercial activities of XXXXX As a result, since there is no provision to exempt the supply from the GST, it is a taxable supply.
4. If it is a taxable supply, is the payment consideration for that supply? If the payment is not consideration for a taxable supply, does section 182 apply to the transaction?
It has now been determined that there has been a supply of a right to dump garbage on the easement. The supply is from XXXXX (as the antecedent company) to the City. However, is the payment under consideration payment for the supply of the right to dump garbage? The agreement to allow the City to dump garbage was made in 19 XXXXX the City has continued to dump landfill on the easement since that time, however, the payment was or will be made in the context of the circumstances where the permission to use the easement has changed (ended). It would be inappropriate to link the payment of XXXXX as consideration for a supply made so many years earlier. It would be more reasonable to consider that the supply made in 19 XXXXX was made for no consideration and that the payment made under the Agreement was not made as consideration for the earlier supply. However, this is not to say that there is not a linkage between the supply in 19 XXXXX and the payment made under the Agreement.
As stated earlier, it is necessary to look beyond the immediate circumstances of the transaction made under the Agreement to the transaction from 19 xx . Although the payment made under the Agreement was not made for the supply of the right to dump garbage, does section 182 apply to the transaction?
The application of section 182 to a particular payment depends upon whether such a payment could satisfy the conditions set out in that provision. Generally, for an amount to be captured under subsection 182(1),
(i) it must be paid or forfeited,
(ii) as a consequence of a breach, modification or termination after 1990 of an agreement for the making of a taxable supply (other than a zero-rated supply) in Canada by a registrant (the supplier),
(iii) by a person to the supplier,
(iv) otherwise than as consideration for the initial supply [i.e. the taxable supply referred to in (ii)], and
(v) would not fall within the exceptions provided in subsection 182(3) of the ETA.
Only where all the above conditions are met does subsection 182(1) deem a taxable supply to have been made by the supplier to the person who paid or forfeited the amount.
If the provisions of section 182 do not apply, it would then be necessary to look to the general provisions of the Act for guidance to determine whether the payment made by the City to XXXXX is consideration for a taxable supply in and of itself.
In light of the comment in the letter to Revenue dated October 23, 1996, it appears that the City is paying the amount, as a consequence of a breach to an agreement for the making of a taxable supply by XXXXX , the payment is not for the initial supply and it is not excluded by subsection 182(3).
Accordingly, the provisions of subsection 182(1) apply to the payment by the City to XXXXX and tax should be collected by XXXXX in accordance with the requirements of this provision.
5. If section 182 does not apply, do the general provisions apply to the transaction?
It has already been determined that section 182 does apply to the transaction between the City and XXXXX therefore it is not necessary to look to the general provisions for guidance in this particular case.
I trust these comments will be of assistance in responding to the inquiry from the City. If you have any questions or require further information on this matter, please contact me at (613) 952-8530.
Ms Gwen Preston
Senior Policy Officer
Policy Unit
General Operations and Border Issues Division
GST Rulings & Interpretations
Policy and Legislation Branch
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