6 August 1998 GST/HST Ruling HQR0000979 - Grants and Subsidies Issues

Dear XXXXX:

Thank you for your letter of December 8, 1997 (with attachments), concerning the application of the Goods and Services Tax (GST) to the financial contribution paid by Her Majesty the Queen in Right of Canada to XXXXX with respect to the operation of the XXXXX for the purposes of ship construction and repair. XXXXX[.]

Statement of Facts

A) The Transfer Agreement:

A Transfer Agreement (Agreement) was entered into by Her Majesty the Queen in Right of Canada (Her Majesty) and XXXXX. The Agreement indicates that Her Majesty agrees to transfer, and XXXXX accepts to purchase all Her Majesty's rights, titles and interests relative to the Lands and the Existing Facilities (Immovable) situated in the XXXXX commonly called: the XXXXX. The Agreement includes a detailed description of the lands and facilities to be transferred.

Her Majesty was represented by the Minister of Public Works and Government Services pursuant to the Surplus Crown Assets Act and Federal Real Property Regulations.

Along with the Agreement, an Act of Transfer and a Contribution Agreement were entered into by both parties and attached to the Agreement as Schedule A and Schedule B respectively. Both Schedules form an integral part of the Agreement.

We understand the Agreement, the Act of Transfer and the Contribution Agreement were signed by both parties on March 31, 1998.

The following are some of the provisions of the Agreement concerning the XXXXX XXXXX agrees to accept title to the property (except mine and mineral rights), subject to municipal bylaws, rights of way, leases, servitudes or any published real rights, and subject to any restriction set out in the original grant from the Crown.

XXXXX acknowledges and agrees that the transfer of the Immovable will be made without any warranty and at its risk and peril.

XXXXX acknowledges that Her Majesty will not be required to provide it with the property titles in her possession, or with a copy of the act of acquisition of the Immovable, or a copy of prior titles.

The Agreement shall be binding on the parties hereto and on their successors and assigns.

B) The Act of Transfer:

Under the Act of Transfer, Her Majesty transfers the Immovable to XXXXX in the consideration of the sum of one dollar ($1.00), subject to certain conditions, in particular the obligation of I XXXXX to continuously operate the XXXXX for the purposes of ship construction and repair.

The following are some of the clauses found in the Act of Transfer:

Her Majesty reserves and creates, for her benefit, for a term of XXXXX from the Transfer Date, on the Immovable transferred herein, as the servient land, a servitude by virtue of which the Immovable may be used only for purposes relating to the operation of a shipyard, and for no other purpose.

Her Majesty is the owner of the Immovable.

The Transferee shall be the owner of the Immovable as and from the date of signature, the Transferee already having possession and occupation of part of the Immovable.

The Transferee agrees to take the Immovable in the condition in which it is found, and declares that it has seen and examined the Immovable to its satisfaction and that it has itself verified with the competent authorities that the purpose for which it intends to use the Immovable is in compliance with the laws and regulations in force.

Her Majesty and the Transferee further agree that the transfer of the Immovable is subject to the following obligations which the Transferee shall assume and comply with for a term of XXXXX from the Transfer Date (Operating Period):

•   By and through its officers, employees, agents, contractors or subcontractors, on its own behalf and not on behalf of Her Majesty, at its cost, continuously, actively, diligently and carefully use the Immovable for the purpose of the operation of a shipyard, in accordance with this Act of Transfer and the applicable laws, and for no other purpose. The Transferee shall further comply with and ensure compliance with the servitude of use of the Immovable which is reserved to Her Majesty in the Immovable. The Transferee shall be deemed to have fulfilled its obligation regarding the operation of a shipyard by leasing the Immovable or the part of the Immovable that continues to be owned by it to a person, or by allowing the Immovable, that continues to be owned by it, to be used by a person, providing that person uses the Immovable for the purpose of the operation of a shipyard, in accordance with this Act of Transfer.

•   The Transferee shall not alienate the Immovable or part of the Immovable, except in accordance with the provisions of article 11.

•   In the event that the Immovable or part of the Immovable is alienated by the Transferee, the Transferee shall require that any purchaser, transferee or assignee perform the obligations that the Transferee has covenanted to Her Majesty to perform.

If, during the Operating Period, at the request of the Transferee or any future purchaser, transferee or assign, Her Majesty renounces the obligation to operate all or part of the Immovable as a shipyard, or in the event of the cessation of operation as a shipyard, the Transferee shall repay to Her Majesty, if Her Majesty so requests, part of the contribution paid by Her Majesty under the Contribution Agreement.

For the purposes of article 11, the expression "Alienation" means any alienation of the real rights in all or part of the Immovable, including, but without restricting the generality of the foregoing, a sale, donation, transfer, exchange, hypothec or transfer by emphyteusis. The Transferee shall not, during the Operating Period, alienate the Immovable or part of the Immovable without first obtaining the written consent of Her Majesty, which may be refused without reasonable cause.

The Transferee will be in default if, during the Operating Period, it:

•   alienates the Immovable or part of the Immovable in breach of the Act of Transfer;

•   becomes bankrupt or insolvent, goes into receivership or takes the benefit of any statute relating to bankruptcy or insolvency or is required to wind up or dissolve by any order or any decision that it is unable to meet its liabilities as they come due;

•   ceases to operate the Immovable or part of the Immovable in accordance with articles of the Act of Transfer, is in default of any provision of the Act of Transfer or is in default of the provisions of the Contribution Agreement and such default continues for a period of thirty days after notice by Her Majesty to the Transferee specifying the nature of the default and requiring the default to be remedied.

Her Majesty and the Transferee expressly disclaim any intention to create a partnership or association, within the meaning of the XXXXX, or a joint venture. It is understood, acknowledged and agreed that nothing contained in this Act of Transfer nor any acts of Her Majesty or the Transferee shall constitute or be deemed to constitute between Her Majesty and the Transferee any partnership or association, within the meaning of the XXXXX, or any joint venture or mandate. The Transferee shall not represent or hold itself out to be a mandatary of Her Majesty. No party hereto shall have any authority to act for or to assume any obligations or responsibility on behalf of the other party hereto.

The parties declare and acknowledge that this Transfer does not constitute a sale of an enterprise within the meaning of articles 1767 et seq. of the XXXXX[.]

The parties declare that the value of the consideration for the purposes of the Excise Tax Act is one dollar ($1.00) and for the purposes of the Act respecting the XXXXX sales tax is one dollar ($1.00).

The GST payable is seven cents ($0.07) and XXXXX[.]

C) The Contribution Agreement:

The Contribution Agreement reflects Her Majesty's engagement to provide XXXXX with a financial contribution (Contribution) for the purposes stipulated in the agreement. The Contribution Agreement will be in force for a term of XXXXX from the transfer date, the term of the operating period specified in the Act of Transfer.

Subject to the terms and conditions of this agreement, Her Majesty agreed to pay a Contribution to XXXXX during the term of this agreement, payable as follows:

XXXXX in installments of XXXXX per year for a term of XXXXX years, representing XXXXX years of continuous operation of the XXXXX, for the purposes of ship construction and repair activities;

XXXXX representing the cost of major repairs to the XXXXX on production of a progress certificate, to be paid into a separate account as determined by the fund management agreement, after being recognized as true and signed for identification by the representatives of the parties in the presence of the notary. Nonetheless it is agreed that until the Fund Manager is identified, the Contribution shall be paid into a separate account of Her Majesty during the period required to appoint the Fund Manager.

The total amount of the Contribution shall be XXXXX[.]

It is agreed that the amount of the Contribution representing the cost of major repairs shall be payable provided that the repairs to be done by XXXXX are done within XXXXX years of the signing of this Agreement. If the major repairs are not done within that time, the uncommitted amount of the Contribution shall be remitted to Her Majesty. The Contribution shall be used only for major repairs to the XXXXX, in the amount of XXXXX in accordance with the description of work to be done on the XXXXX set out in Appendix A "Allowable Expenses" (not attached to the request).

We understand there is no obligation for XXXXX to enter into subsequent agreements to provide ship construction and repair services to Her Majesty following the Contribution received.

Ruling Requested

What is the GST status of the financial Contribution paid by Her Majesty the Queen in Right of Canada to XXXXX with respect to the operation of the XXXXX for the purposes of ship construction and repair.

Based on the facts set out above, we rule that payments made by Her Majesty to XXXXX with respect to the operation of the XXXXX for the purposes of ship construction and repair during the operating period are not consideration for a supply and are not subject to GST.

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 Excise Tax Act, or to departmental interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

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