5 August 1998 GST/HST Ruling HQR0000854 - Tax Status of Payments Made by the to the

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

Dear XXXXX:

Thank you for your letter of April 29, 1997 (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transaction(s) described below.

Statement of Facts

Our understanding of the facts is as follows:

1. The XXXXX is a body corporate that was established by the XXXXX (Minister) for the purposes of managing scrap tires (i.e. to administer a program for the collection and processing of scrap tires generated XXXXX[.] The governing legislation is the XXXXX (Regulation) made under XXXXX (Act).

2. The XXXXX is authorized by the Regulation to:

•   subject to the Act, finance any of its undertakings through fees and through such other means as may be approved by the Lieutenant-Governor in Council.

•   make arrangements and enter into agreements and contracts in relation to a scrap management program.

•   establish and administer a scrap tire management program, including the management of the distribution, supply, packaging, labelling, use, storage, collection, transportation, recycling, processing, disposal and other handling of tires and scrap tires. operate scrap tire storage, collection, transportation, recycling, processing or disposal facilities.

•   employ persons, establish their conditions of employment and provide for and pay their compensation and reimbursement.

3. The Regulation requires suppliers of new tires to be registered with the XXXXX[.] The XXXXX is also authorised by the Regulation to collect from suppliers of new tires a fee for each new tire supplied by them in XXXXX. The current fee is $ x or $ x per tire depending upon the size of the tire and is remitted to the XXXXX on a monthly basis. The XXXXX uses the fee collected solely to meet its purposes as established under the Act.

4. XXXXX as represented by the Minister entered into an agreement (Agreement) with the XXXXX for the collection and the recycling of old tires. As provided for in the Agreement, the Minister has assigned all of his rights, responsibilities and authorities under the Agreement to the XXXXX[.] It is consequently the XXXXX that is making payments to XXXXX[.] The Agreement provides that:

•   XXXXX agrees to collect and process scrap tires in accord with the terms of the Agreement and the Minister shall make payment to XXXXX for such collection and processing. Processing means the completion of the tasks of shredding of scrap tires, removal of the fibre and metal and crumbing the rubber, and with other additives, molding the rubber into marketable products for resale. The tires are stored and processed in facilities owned by XXXXX shall, commencing September 30, 1996, collect derimmed scrap tires from all locations as designated by the Minister at such times and in accord with such priorities as may be identified in writing from time to time.

•   XXXXX undertakes that it shall commence processing of scrap tire in accord with the terms of the Agreement no later than January 20, 1997. (Your letter indicates that this deadline was not met).

•   XXXXX shall store scrap tires which have been collected at sites and under such terms and conditions which comply with the technical guidelines for such storage.

•   XXXXX shall make available to retailers operating designated sites who so request, a cage for holding scrap tires pending collection. XXXXX may require a refundable damage deposit from such retailers in an amount not exceeding the cost of the cage. Retailers shall continue to be responsible for storage of tires at their location until collected. XXXXX is responsible for loading the tires on the vehicle used for collection and shall not impose unreasonable demands upon retailers for assistance

•   Commencing on September 30, 1996 and terminating January 20, 1997, the Minister shall pay to XXXXX $ XXXXX for each PTE(1) upon collection and delivery to the processing plant during that period. PTE(1): XXXXX means a weight of XXXXX kilograms determined before other components are removed from scrap tires.

•   Commencing on January 20, 1997, the Minister shall pay to XXXXX upon completion of processing and after sale of reconstituted rubber product, the value of XXXXX PTE(2) less any payment made under the paragraph above. PTE(2): XXXXX means a weight of XXXXX kilograms of rubber determined after other components have been removed from scrap tires.

•   Commencing January 20, 1997, XXXXX shall have the right to obtain an interim payment of XXXXX for each PTE(1) upon completion of shredding.

5. You have indicated in your letter that the fee structure was not changed effective January 20, 1997 as stipulated in the Agreement. In a subsequent fax message you explained that this was due to the fact that the production was behind, and confirmed that the payment structure established in the Agreement is in place since the beginning of this year.

Ruling Requested

XXXXX paid to XXXXX for every PTE(1) collected is consideration for an exempt supply under paragraph 20(h) of Part VI of Schedule V to the Excise Tax Act (ETA).

XXXXX per PTE(2) paid to XXXXX upon completion of processing and sale of a reconstituted rubber product is not consideration for a supply and is not subject to tax.

Ruling Given

Based on the facts set out above, we rule that the total amount of XXXXX per tire paid by XXXXX to XXXXX under the Agreement is consideration for a taxable supply provided by XXXXX to the XXXXX and is subject to HST.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST 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 ETA, or to departmental interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

The XXXXX is not making payments for two different transactions as suggested in your submission. The Agreement provides that XXXXX would be paid a total of XXXXX for each tire collected and processed. However, XXXXX could claim an interim payment of $ XXXXX per tire upon delivery to the processing plant (before January 20, 1997) or upon completion of shredding (starting January 20, 1997), and the rest of the amount would be payable upon completion of processing and after sale of reconstituted rubber product. All payments made to XXXXX for the collection and processing of old tires will have the same tax status.

Section 165 of the ETA requires recipients of taxable supplies to pay tax in respect of the supply calculated on the value of the consideration. Therefore, it must be determined if the payments made under the Agreement are consideration for a supply. To determine if a payment is consideration for a supply, it must first be established whether the recipient of the payment has made or will make a supply in return for the payment.

The XXXXX was established with the mandate to administer a program for the collection and processing of scrap tires generated in XXXXX[.] Therefore, it can be argued that the XXXXX is responsible for the recycling of scrap tires in XXXXX[.] In fact, the XXXXX is authorized under the Regulation to operate a tire recycling facility with the money collected from suppliers of new tires. However, instead of carrying out the recycling activities itself, the XXXXX pays XXXXX to collect and recycle old tires. The XXXXX is purchasing services from XXXXX and therefore the payment is consideration for a taxable supply.

You questioned whether a portion of the money paid to XXXXX could be consideration for a supply that is exempt under paragraph 20(h) of Part VI of Schedule V to the ETA. This paragraph applies to a supply of a service of collecting recyclable materials made by a government or municipality or by a board, commission or other body established by a government or municipality. As there is no indication that XXXXX was established by a government or a municipality, this exempting provision does not apply.

Ruling Requested

Should the retailers remit the environmental levy directly to XXXXX and the XXXXX subsequently invoice XXXXX a management fee for the administration of this program, would this be considered commercial activity and would the management fee attract HST? Would this in turn allow the XXXXX to claim Input Tax Credits (ITCs) with respect to this commercial activity?

Information Given

The Department does not provide rulings based on hypothetical situations, therefore we are providing general information with respect to your question. If the facts were as presented above and the only variation was that the fee was paid to XXXXX and then redirected to the XXXXX it is our view that the payment by the Department to the XXXXX would not be consideration for a supply and would not be subject to tax. The XXXXX would not be entitled to ITCs since it does not make any taxable supplies for consideration. If that payment qualified as government funding and if the XXXXX is a non-profit organization as defined in the ETA, the XXXXX could be entitled to a rebate under section 259 of the ETA.

Clarification Requested

On November 14, 1996, the XXXXX Tax Services Office (TSO) issued a ruling to the XXXXX saying that it is not eligible to claim any tax credits as it is considered to have exempt activities as opposed to commercial activities. You want us to revisit the conclusion and provide appropriate legislative reference.

Information Given

The Department's current opinion is that the XXXXX does not make any supply in return for the fee collected from suppliers of new tires and the fee is not consideration for a supply. The fee collected is used by the XXXXX to meet its purposes as established under the Act.

Section 169 of the ETA allows registrants to claim ITCs for tax paid or payable on the inputs used in the course of commercial activities. Section 141.01 of the ETA specifies that an input is regarded as being for use in commercial activities only to the extent it is for use in making taxable supplies for consideration. As the XXXXX does not make any taxable supplies for consideration, it is therefore not entitled to claim ITCs.

As stated above, the XXXXX is denied ITCs because it does not make any supply at all rather than because it is making exempt supplies as implied in the TSO ruling. However, the tax consequences in both situations are the same: the fee is not subject to tax when collected by the XXXXX from the supplier of new tires, and the XXXXX is not entitled to claim ITCs. Persons who make exempt supplies only or who are involved in activities where there is no supply made are generally not entitled to claim ITCs.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9589.

Yours truly,

B. Mulinda
Governments Sectors Unit
GST Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate

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