1 September 1998 GST/HST Interpretation HQR0000628 - Excise Tax Act Subsection 153(3)

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

Dear XXXXX

This is in response to Ms. XXXXX letter of April 1, 1997, concerning the application of the goods and services tax (GST)/harmonized sales tax (HST) to your operations.

Statement of Facts

The Department was provided with an explanation of the steps involved in the exchange of wood logs for wood chips and a copy of a contract for the exchange of wood fiber.

Our understanding is that a common transaction in the wood industry is an exchange of wood logs for wood chips between a manufacturer of newsprint and a sawmill. The sawmill uses the logs, which have been cut and delivered to the sawmill by the pulp and paper manufacturer, as inventory in the manufacture of lumber for sale. The wood chips are the residue of that process of manufacture, and are in turn supplied to the paper mill to be used as inventory in the manufacture of paper products for sale. The exchange is made on a quantity basis (cubic meters of logs for cubic meters of chips) used in the wood industry. The contract provided specified an exchange of XXXXX cubic meters of wood chips for XXXXX cubic meters of wood logs. No value is determined and no invoices are prepared. The conditions in paragraphs 153(3)(b) and (c) of the Excise Tax Act (ETA) are met by both the supplier and the recipient, i.e., both the sawmill and the newsprint manufacturer are registrants and both use the products as inventory in their respective operations.

Interpretation Requested

XXXXX asked whether wood chips and wood logs qualify as property of a particular class or kind, so that the value of consideration for the supply made by the sawmill and the pulp and paper manufacturer in the barter transaction will be nil under subsection 153(3) of the ETA.

Interpretation Given

Based on the information provided, it is the Department's position that the exchange of wood logs for wood chips in the wood industry do not qualify as properties of a particular class or kind for purposes of subsection 153(3) of the ETA.

Analysis

Subsection 153(3) of the ETA states:

Where

(a) the consideration or a part of the consideration for a supply of property of a particular class or kind is property of that class or kind,

(b) both the supplier and the recipient are registrants, and

(c) the property is acquired by the recipient and the consideration or that part thereof is acquired by the supplier as inventory for use exclusively in commercial activities of the recipient or supplier, as the case may be, the value of the consideration or that part thereof shall be deemed to be nil.

It is our understanding that both the sawmill and the pulp and paper manufacturer are registrants therefore paragraph (b) is met. The sawmill uses the wood logs to produce wood planks or boards, i.e. the blocks are used as raw materials inventory in the commercial activity of the sawmill. The pulp and paper manufacturer uses the wood chips as raw materials inventory in the production of newsprint. Paragraph (c) is met. The main issue lies in the interpretation of paragraph (a) and the phrase "particular class or kind".

The Department is currently in the process of preparing a policy statement outlining the Department's position with respect to the exchange of property between two GST/HST registrants. The Department will consider two properties to be properties of a particular class or kind if they meet all of the following criteria:

•   they are similar in their constituent materials and general appearance;

•   they have the same primary end-use;

•   they have been subject to a similar level of processing or refining, where applicable, and

•   they are capable of performing the same primary functions.

Although both the logs and the wood chips are made up of wood fiber, they are basically different in other material respects. In particular, they do not have the same end-use; logs and wood chips are usually used for different purposes.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above or any other GST/HST matter, please do not hesitate to contact me at (613) 952-9577 or Duncan Jones at (613) 952-9210.

Yours truly,

Marilena Guerra
Rulings Officer
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch