28 August 1998 GST/HST Ruling HQR1040 - Application of the GST/HST to the Acquisition of Assets of a Joint Election

Dear XXXXX

I refer to your letters of October 31 and December 23, 1997, January 19, March 20, April 15 and April 27, 1998, your message with attachments of June 29, 1998 as well as our conference call of January 14, 1998, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transactions described below for which we were unable to provide a ruling in our previous advance and application ruling of December 30, 1997 (Case No. 935/file 11895-4) based on the facts provided at that point in time.

Statement of Facts

1. XXXXX is a wholly owned subsidiary of the XXXXX (the City) and was incorporated under the XXXXX XXXXX 1997. XXXXX registered for the purposes of GST/HST effective XXXXX[.]

2. XXXXX a wholly owned subsidiary of XXXXX was incorporated under the XXXXX on XXXXX XXXXX is registered for the purposes of the GST. The registration is effective XXXXX[.] The business number for XXXXX is XXXXX[.]

3. Under the terms of the Master Agreement dated XXXXX [b]etween the City and XXXXX the City has sold, assigned and transferred to XXXXX certain assets, rights and obligations of the City effectiv[e] XXXXX for the payment by XXXXX to the City of the purchase price.

4. Subsequent to the transaction mentioned in paragraph 3, XXXXX and XXXXX have entered into a Supplementary Master Agreement dated XXXXX[.] Under this agreement, XXXXX being the legal and beneficial owner of all the issued shares of XXXXX has agreed to (i) sell, assign and transfer to XXXXX certain of the property, assets and rights purchased, acquired and taken by way of assignment by XXXXX from the City pursuant to the Master Agreement together with the Municipal Consent and Access Agreement re XXXXX[.]

5. Assets are defined in section 1.1.3 of the Supplementary Master Agreement to mean assets as defined in the Master Agreement and shall include the Municipal Consent and Access Agreement re: XXXXX[.]

6. Assets as defined in section 1.1.2 of the Master Agreement means, exclusive of the Excluded Assets, the property of the City notionally under the administration and control of the XXXXX as of XXXXX and shown as or included within the assets on the Closing Balance Sheet and for greater certainty, but subject to any specific provision of this Agreement to the contrary, includes:

1. the Transmission and Distribution System;

2. the Communications Facilities;

3. the Real Property;

4. the Equipment, Inventory and Other Property described in Schedule 2 to the Master Agreement;

5. the Computer Systems;

6. the Vehicles;

7. the goodwill, if any, associated with XXXXX together with the right of XXXXX to represent itself as carrying on the Business in continuation to and as successor of XXXXX and the use of any words indicating that the Business is so carried on including all of the right of the City to the use of the name, trademarks, trade names, logos and their identification of XXXXX as permitted by the Licence Agreement attached in Schedule XXXXX of the Master Agreement; all of the right of the City to use and retain XXXXX telephone, facsimile and telegraph numbers; and all required authorizations issued by a federal, provincial or municipal authority or agency thereof and required in the continued operation of the Business to the extent the same may be assignable by the City;

8. the Contracts and all work commitments relating to same and all other work commitments made by the City in connection with XXXXX whether or not there are any written contracts with respect thereto;

9. copies of all books and records relating to the operations and activities of XXXXX

1. all designs, drawings, plans, instructional and promotional and advertising plates, blocks, negatives and other similar materials, sales publications and technical materials of XXXXX[;]

2. subject to required governmental and other consents, the full benefit and entire interest of XXXXX in and to the approvals, permits, licences, order, orders in council, rights and interests described in Schedule 4 and other rights and interests of XXXXX related thereto;

3. and all the other elements listed and comprised in section XXXXX of the Master Agreement.

1. Municipal Consent and Access Agreement re: XXXXX[.]

2. Section XXXXX of the Supplementary Master Agreement defines Excluded Assets to mean "Excluded Assets" as defined in the Master Agreement and shall also include those further excluded assets described in Schedule XXXXX to the Supplementary Master Agreement.

3. Section XXXXX of the Master Agreement defines Excluded Assets as follows:

1. the right to grant, amend or interfere with any present or future franchise granted by the City or to be granted by the City;

2. all records maintained by the City with respect to XXXXX of the Master Agreement;

4. the freehold interests of the City in the lands described in Schedule XXXXX of the Master Agreement;

5. and all the other elements listed and comprised in section XXXXX of the Master Agreement.

6. The Excluded Assets pursuant to Schedule XXXXX of the Supplementary Master Agreement are:

1. Infrastructure - XXXXX[;]

2. Buildings and Facilities - Leasehold interests in the XXXXX[;]

3. General Support/Services Assets - Certain computer resources and related assets to be agreed to between XXXXX and XXXXX from time to time, certain furniture and computers and related equipment to be agreed to between XXXXX and XXXXX from time to time, certain tools and equipment to be agreed to between XXXXX and XXXXX from time to time, certain fleet items including vehicles and related equipment to be agreed to between XXXXX and XXXXX from time to time, and electronic test equipment;

4. Inventory - electronic shop materials and testing materials inventory; and

5. any other real or personal property agreed to from time to time by the parties that shall constitute excluded assets for the purposes of section XXXXX of the Supplementary Master Agreement.

6. During our conference call of January 14, 1998, you provided clarification related to the phrase "from time to time" in Schedule XXXXX of the Supplementary Master Agreement. You advised that you did not have the opportunity to identify the support assets that would be transferred to XXXXX from XXXXX when the Supplementary Master Agreement was drafted. Since drafting the agreement, you have determined the asset split, and confirm that there has been one single transfer of assets to effect the transaction between XXXXX and XXXXX as described in the Supplementary Master Agreement.

7. In your letter dated January 19, 1998, an estimate of the summary of the total assets that are being transferred from XXXXX (Consolidated column), the assets that are being transferred from XXXXX to XXXXX and the assets remaining with XXXXX was provided as follows:

1. The assets remaining in XXXXX are the Excluded Assets pursuant to Schedule XXXXX of the Supplementary Master Agreement. In addition, it is expected that XXXXX of the assets will be transferred from XXXXX to XXXXX and the excluded assets are XXXXX of the value of the total assets of XXXXX[.] Furthermore, it is anticipated that the value of the actual assets upon completion of the normal year-end closing process will not materially differ from the estimate.

2. XXXXX operates the regulated aspect of the distribution of electricity, i.e., the wires business. It owns the physical assets for and carries out the delivery of electrical energy and related services to more than XXXXX customers. XXXXX accepts delivery of electrical energy from the provincial electrical grid at high voltage bulk supply substations in the XXXXX area. XXXXX also transmits energy to substations located around the City where the voltage is stepped down to distribution levels and distributed throughout the neighbourhoods. XXXXX of the electricity acquired by XXXXX from the XXXXX is used by XXXXX to make taxable supplies of electricity to residential, commercial and industrial customers. Less than XXXXX of the supplies of electricity is made as taxable supplies to the City to be consumed by various divisions of the City. Related services to customers include meeting their facility installation needs as well as restoring power after disruptions, e.g. storms.

3. XXXXX[.]

[4.] XXXXX[.]

5. Furthermore, certain service level agreements, e.g., XXXXX have been assigned to XXXXX from XXXXX Other service level agreements, e.g., fleet repairs and maintenance, will be either fully or partially assigned to XXXXX from XXXXX[.] The service level agreements that will be assigned, are to be assigned before the end of the year.

Ruling Requested

XXXXX and XXXXX will be eligible to make a joint election under subsection 167(1) of the Excise Tax Act with respect to the acquisition of the assets described in the Supplementary Master Agreement (and Master Agreement).

Ruling Given

Based on the facts set out above, we rule that:

XXXXX and XXXXX may jointly make an election under subsection 167(1) of the Excise Tax Act to have subsection 167(1.1) of the Excise Tax Act apply to the acquisition of assets described in the Supplementary Master Agreement (and Master Agreement) subject to the exclusions enunciated in paragraph 167(1.1)(a) of the Excise Tax Act.

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 transactions for which you requested a ruling.

Should you have any further questions or require clarification on the above matter, please contact Owen Newell, Municipalities and Health Care Services at (613) 954-4280 or Jacques Allard, Corporate Reorganizations at (613) 954-4394.

Yours truly,

P. Bertrand
A/Director
Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate