3 September 1998 GST/HST Interpretation HQR0001105 - Application of the GST to Project Development Costs of a Terminated Joint Venture

Dear Sir:

This is in reply to your enquiry of February 19, 1998 addressed to our XXXXX Tax Office concerning the application of the Good and Services Tax (GST) to the transactions described below.

Statement of Facts

1.  XXXXX owns and operates XXXXX and related facilities. XXXXX desires to reduce the sulphur dioxide emissions from its plant site, and has decided to convert the existing utility plant to a low-emission XXXXX XXXXX[.]

2.  XXXXX has the expertise in the design, construction and operation of XXXXX and desires to work with XXXXX on the proposed conversion.

3. Pursuant to a memorandum of understanding (the "Memorandum") dated XXXXX agree to undertake the conversion (the "Project").

The Memorandum contains the following relevant terms:

•   The Project shall be undertaken and owned by an unincorporated joint venture XXXXX[.]

•   XXXXX each shall have a XXXXX undivided ownership interest in the Venture. XXXXX[.]

•   The parties shall constitute an owner's committee XXXXX for managing the business and affairs of the Venture and the Project. XXXXX[.]

•   The funding requirements of the Project shall be financed XXXXX by debts and XXXXX by equity contributed by the parties. XXXXX agrees to loan XXXXX once funds are available from the financing XXXXX of equity XXXXX is required to contribute to the Project XXXXX[.]

•   Until the funds are available from the financing to be arranged, Project Development Costs shall be funded by the parties. Project Development Costs which are internal costs of a party shall be borne by that party until repayment pursuant to Section 6.2. Project Development Costs which are third party costs shall be paid by either party and the other party shall be invoiced monthly for its share. (Section 6.1)

•   The term Project Development Costs is defined to mean the costs incurred by the parties or the Venture in connection with the development of the Project, as and to the extent approved by XXXXX[.] These costs include expenses of XXXXX and subcommittees and their members during the development phase, the salaries and benefits of employees, and the costs of technical, legal and financial advisors. XXXXX[.]

•   XXXXX and the Venture shall enter into contract(s) for the purchase by XXXXX from the Venture of the XXXXX. The take obligations and pricing shall be such that under agreed to operating assumption, XXXXX over the Project Term, as those terms are defined in the XXXXX - XXXXX - XXXXX - XXXXX[.]

4. XXXXX[.]

Interpretation Requested:

Whether the early termination amount paid by XXXXX to XXXXX as a result of XXXXX decision to abandon the Project pursuant XXXXX is subject to the application of subsection 182(1) of the Excise Tax Act (the "Act").

Interpretation Given:

Based on our understanding of the terms of the Memorandum as described above, it is our view that the termination payment made by XXXXX to XXXXX as a result of XXXXX decision to abandon the Project pursuant to XXXXX is not subject to the application of subsection 182(1) of the Act.

Explanation:

Subsection 182(1) of the Act applies where, "as a consequence of the breach, modification or termination after 1990 of an agreement for the making of a taxable supply (other than a zero rated supply) of property or a service in Canada by a registrant to a person", an amount is paid or forfeited by the person to the registrant otherwise than as consideration for the supply.

In the situation of XXXXX, the payment (or the reimbursement) of the amount to XXXXX was not made as a consequence of the breach or termination of any agreement for the making of a taxable supply by XXXXX to XXXXX[.] The payment was made as a result of XXXXX decision to abandon the Project which was owned and operated jointly by XXXXX and XXXXX . As such, subsection 182(1) of the Act will not have application to the payment.

Should you have any further question on the above, please do not hesitate to contact me at (613) 954-1433.

Yours truly,

P. Tang
Specialty Tax Unit
Financial Institutions & Real Property Division
GST/HST Rulings & Applications Directorate.

c.c.:      XXXXX