File: 11630-1
HQR0000278
Dear XXXXX
We are replying to your memorandum of August 6, 1996, addressed to XXXXX XXXXX in which you asked for assistance in determining whether a management company XXXXX, as manager of several restaurants, is liable for collecting and remitting the Goods and Services Tax (GST) and, as a result, can be assessed for unpaid tax. We apologize for the delay in responding.
Facts
Our understanding of the facts based on the Management Agreements provided and our telephone conversation of February 28, 1997, is as follows:
1. XXXXX, a registered corporation for GST purposes, has entered into Management Agreements (Agreement) with several related corporations to manage and operate certain restaurants on behalf of the owners of the establishments (Owners).
2. The Owners do not have source deduction accounts with Revenue Canada.
3. XXXXX under the Agreement, employs and trains the restaurant staff. In addition, XXXXX purchases food, beverages and equipment for the restaurants.
4. Business licences were issued to certain restaurant Owners.
5. The XXXXX advised that XXXXX they have issued licences to the restaurant Owners. These licences would still be active.
6. All revenue receipts and funds related to the restaurant business are controlled by XXXXX[.] In addition, XXXXX is collecting GST from the restaurant customers.
7. XXXXX is paying to the Owners on a monthly basis "Net Proceeds". "Net Proceeds" means the difference between the aggregate monthly cost of managing and operating the restaurants plus the Management Fee and the gross sales of the restaurants.
8. From the information provided, we are making the assumption that no agency relationship exists between XXXXX and the Owners.
9. None of the Owners are bankrupt under the Bankruptcy and Insolvency Act.
Comments
The issue to be resolved is whether XXXXX as manager of the restaurants, is the supplier (person who makes a taxable supply) of the meals, i.e., food and beverages, to the customers. The answer to the question of who is supplying the restaurant meals to the customers depends on the relationship between XXXXX and the Owners.
Although, under the Agreement, the staff may be employees of XXXXX and trained by XXXXX this fact is not in itself a determining factor to settle the issue of who is supplying the meals to the customers. The factors which should normally be considered to determine the intent of the parties are the language of the Agreement, its purpose and the circumstances surrounding the conclusion of the Agreement.
For example, clause XXXXX of the Agreement regarding XXXXX obligations states in part that the Manager shall do the following:
"(b) collect all monies received from the Restaurant and deposit such monies in a designated bank account as the Owner may from time to time direct the Manager to use;
(c) establish and maintain accounting records for the Restaurant which accounting records shall be compatible with the accounting practices of the Owner;
(e) provide the Owner not later than one (1) month following the end of each year of the Term, a financial statement and balance sheet in respect of the Restaurant [...]"
In brief, XXXXX must account for monies and report to the Owners for numerous matters on a timely basis. In addition, pursuant to clause XXXXX has no authority to terminate any agreement relating to the restaurants without the authorization of the Owners.
Furthermore, the Agreement between XXXXX and the Owners states unequivocally at clause XXXXX that "The Owner hereby retains the Manager's services and the Manager hereby agrees to operate and manage the Restaurant" on behalf of the Owners.
Clause XXXXX of the Agreement also states in part that
"In consideration of the services provided by the Manager, the Owner agrees to pay the Manager as compensation for its services and aggregate monthly cost of managing and operating the Restaurant plus a fee of XXXXX of the Gross Monthly Sales for the Restaurant, payable monthly (the "Management Fee")."
Given that the above clauses stipulated in the Agreement reflect how the Owners exercise control over XXXXX it is our view that the Agreement is really one for management services. The supply of the management services provided by XXXXX to the restaurant Owners constitutes a taxable supply and, as a result, XXXXX must, under subsection 221(1) of the Excise Tax Act (the "Act"), collect GST from the Owners.
Since we have determined that, under the Agreement, XXXXX is making a supply of management services to the Owners, then, the Owners would be making the supply of the restaurant meals to the customers. Consequently, the Owners would be responsible under subsection 221(1) of the Act for collecting GST.
However, in this particular case, it is XXXXX instead of the Owners, who is collecting GST from the customers. Pursuant to section 222 of the Act, a fiduciary duty to remit the collected tax component of the supply falls upon XXXXX by virtue of the act of collection. Specifically, subsection 222(1) of the Act states that, excepting bankruptcy, any person, not just the supplier, who collects amounts as or on account of tax is deemed to hold the tax or amounts collected in trust for Her Majesty until they are remitted to the Receiver General or withdrawn under subsection 222(2) of the Act.
In addition, the act of collection triggers various reporting and remitting requirements such as those contained in section 228 of the Act. Under this section and subsection 225(1) of the Act, persons collecting amounts as or on account of tax are required to report these amounts in their net tax and to remit the net tax to the Receiver General.
In view of policy P-131, Remittance of Tax by a Third Party, note that despite the fact that a third party is required to report and remit GST amounts collected, the Department will continue to also place the obligation to report and remit these GST amounts on the supplier. However, it is not the Department's intention to collect tax twice on the same supply.
For the above reasons, XXXXX would be liable under subsection 221(1) for collecting tax on the supply of management services provided to the Owners. In addition, XXXXX would be obligated under section 222, as stated above, and subsection 225(1) to remit the tax collected on the restaurant meals.
Note that, under subsection 222(1.1), subsection 222(1) does not apply where a person becomes bankrupt to any GST amounts collected or that become collectible before bankruptcy.
Should you have any questions or wish to discuss this matter further, please call me at (613) 954-4394.
J.E. Allard
Rulings Officer
Financial Institutions and Real Property Division
GST Rulings and Interpretations Directorate
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