8 July 1998 GST/HST Ruling HQR0001114 - Tax Status of Supplies Made By

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

XXXXX

Case: HQR0001114 File: 11590-2

Attention: XXXXX

July 8, 1998

Subject:

GST/HST APPLICATION RULING Tax Status of Supplies Made By XXXXX

Dear Sir:

I refer to your letter of March 26, 1998, and our telephone conversation of June 4, 1998, regarding the XXXXX. As we discussed, your ruling requests regarding whether the XXXXX is considered to be a non-profit organization and whether subsection 274(2) of the Excise Tax Act (the "Act") applies to the proposed transactions have been withdrawn. However, a ruling regarding the tax status of supplies made by the XXXXX is requested.

Statement of Facts

Our understanding of the facts is as follows:

1. "Subscribers" means XXXXX. The Subscribers reside in or near XXXXX[.]

2. The Subscribers arranged for the XXXXX to be incorporated on XXXXX, 19 XX, under the name XXXXX, as a not-for-profit limited company under Part 9 of the XXXXX[.]

3. The XXXXX states that the XXXXX objects are, inter alia:

(a) to carry on, without pecuniary gain to its shareholders, objects of a social welfare, civic improvement, pleasure or recreation (including sporting) nature and to establish, develop, maintain, operate, improve, enhance, repair, renovate and support (including by subsidizing costs that may otherwise be incurred) XXXXX and programs or services used or useful in connection therewith; and

XXXXX

(i) XXXXX

(ii) XXXXX

(iii) to the extent that the XXXXX income exceeds its administrative costs and the amount required XXXXX, to apply the excess to support XXXXX by payment of or making contributions toward the establishment, development, maintenance, improvement, enhancement, repair, renovation and other operating and capital costs, of whatsoever nature and kind, of or associated with XXXXX XXXXX which are used by XXXXX[.]

4. The XXXXX also states, inter alia:

(a) The liability of the shareholders of the XXXXX is limited.

(b) The income and property of the XXXXX wheresoever derived shall be applied solely towards the promotion of the objects of the XXXXX as described in the memorandum of association and no portion thereof shall be paid or transferred to, or be available directly or indirectly, by way of dividend, bonus or otherwise howsoever for the benefit of, any shareholder or shareholders of the XXXXX provided that nothing herein shall prevent the repayment of any loan from, or indebtedness of the XXXXX to, any shareholder or director or the payment in good faith of reasonable remuneration to any employee of the XXXXX including a shareholder or director in return for any services actually rendered to the XXXXX[.]

(c) For greater certainty, the XXXXX is to be organized and operated solely for a purpose other than profit.

(d) The XXXXX is authorized to issue XXXXX shares without nominal or par value.

(e) XXXXX[.]

(f) XXXXX.

(g) To the extent that the XXXXX earns income in a particular year in excess of its expenditures for that year, the excess will not be accumulated for any period of time longer than is reasonable to ensure that the XXXXX activities may be carried on and its objects accomplished.

(h) If upon the winding-up, dissolution, liquidation or amalgamation of the XXXXX there remains, after the satisfaction of all debts and liabilities of the XXXXX any property whatsoever, the same shall not be paid to or distributed amongst the shareholders of the XXXXX but shall be paid over, given or transferred XXXXX[.]

6. The Subscribers each subscribed for, and now hold, one share respectively of the capital stock of the XXXXX[.]

7. In XXXXX[.]

XXXXX[.]

Proposed Transactions

The following transactions are proposed:

9. XXXXX[.]

10. Thereafter, shares of the capital stock of the XXXXX will be issued or transferred only to XXXXX[.]

11. The XXXXX will create a class of XXXXX to the public in XXXXX[.]

XXXXX will be widely offered throughout XXXXX most likely through XXXXX[.]

14[.] XXXXX will be sold in only one denomination, most likely in the range of $ XXXXX to $ XXXXX. The principal amount of each XXXXX will be equal to the amount for which it is sold. The XXXXX will not be sold at a discount.

15. The XXXXX will be redeemable at any time at the option of the XXXXX or the respective Holders. On the redemption of a XXXXX the XXXXX will pay to the Holder thereof the principal amount of the XXXXX and no more. No premium or bonus will be paid by the XXXXX on the redemption of a XXXXX.

16. The XXXXX will not bear interest, nor will they provide for any other fixed or determinable yield or return.

17. The XXXXX will be XXXXX. The XXXXX of the XXXXX will be used in conducting the XXXXX.

18. The XXXXX will apply to the XXXXX for a XXXXX to conduct the XXXXX in XXXXX the XXXXX will conduct the XXXXX. The XXXXX will not sell XXXXX XXXXX; rather, until such time as a XXXXX is redeemed, the serial number of the XXXXX will be eligible for selection in ongoing periodic XXXXX XXXXX[.] Pursuant to the XXXXX, XXXXX will be distributed by chance XXXXX. Each time that a XXXXX draw is held, a range of XXXXX will be distributed, XXXXX[.]

20. No portion of the selling price (i.e., the principal amount) of a XXXXX will be allocated by the XXXXX to the right inherent in the XXXXX for the Holder thereof to participate in the XXXXX, nor will any consideration be stipulated as being payable for this right.

21. The XXXXX will invest the money which it receives on the sale of the XXXXX. The investment income will be used by the XXXXX in the order and manner set out below:

(a) to pay the administrative costs of the XXXXX[;]

(b) XXXXX[;]

(c) to support XXXXX[.]

22. It is anticipated that the XXXXX XXXXX investment income.

23. In supporting XXXXX in XXXXX the XXXXX will not provide funds directly to the XXXXX. Rather, the XXXXX financial support will be directed toward the community-owned facilities XXXXX) that are used by the XXXXX.

24. XXXXX[.]

25. After its incorporation and continuing throughout the period of time that the XXXXX are outstanding, the XXXXX will operate in conformity with its XXXXX. For greater certainty:

(a) the XXXXX will be organized and operated solely for a purpose other than profit; and

(b) no part of the income of the XXXXX will be payable to, or otherwise available for the personal benefit of, any shareholder of the XXXXX (in its capacity as a shareholder).

26. After the transfer by the Subscribers of their respective shares of the capital stock of the XXXXX to three XXXXX and continuing throughout the period of time that the XXXXX are outstanding:

(a) all of the issued shares of the capital stock of the XXXXX will be owned by XXXXX; and

(b) the XXXXX investment activities will be carried on and its investment decisions will be made within the geographical boundaries of one or more of the XXXXX that are shareholders of the XXXXX[.]

Purpose of the Proposed Transactions

The purpose of the Proposed Transactions is to raise money, by means of the XXXXX and the investment of the proceeds of the sale of the XXXXX, to support XXXXX in XXXXX by providing financial assistance to establish, develop, maintain, operate, improve, enhance, repair, renovate and support XXXXX used by the XXXXX or to subsidize the costs that would otherwise be incurred by the communities in making their facilities available to the XXXXX.

Rulings Requested

You request that the Department provide the following GST application rulings:

A. For purposes of the Act, a sale by the XXXXX of a XXXXX (including the inherent right to participate in the XXXXX) will be a single supply of the XXXXX (with the inherent right), and not separate multiple supplies of the XXXXX and the right.

B. Alternatively, if a sale of a XXXXX (including the inherent right to participate in the XXXXX) will not be a single supply (which you do not admit to), the right to participate in the XXXXX will be deemed, by reason of section 138 of the Act, to form part of the XXXXX.

C. Still in the alternative, if a sale of a XXXXX (including the inherent right to participate in the XXXXX) will not be a single supply (which you do not admit to), the sale of each of the XXXXX and the right to participate in the XXXXX will be deemed, by reason of section 139 of the Act, to be a supply of a financial service.

D. Further in the alternative, if a sale of a XXXXX (including the inherent right to participate in the XXXXX) will not be a single supply (which you do not admit to), on the sale of a XXXXX by the XXXXX to the prospective Holder thereof for a particular sale price, subsection 153(2) of the Act will not apply to allocate any portion of that price to the right inherent in the XXXXX to participate in the XXXXX.

E. By reason of section 1 of Part VII of Schedule V to the Act, a sale by the XXXXX of a XXXXX (including the inherent right to participate in the XXXXX) will be an exempt supply.

F. Ruling F has been withdrawn.

G. In the event that a Holder receives, or becomes entitled to receive, a XXXXX, by reason of section 1 of Part VII of Schedule V to the Act, the payment of the XXXXX by the XXXXX to the Holder will be an exempt supply.

H. In the event that a Holder receives, or becomes entitled to receive, a XXXXX by reason of section 1 of Part VII of Schedule V to the Act, the surrender of the Holder's right to receive the XXXXX, upon the XXXXX being paid, will be an exempt supply.

I. In the event that a XXXXX of a Holder is redeemed, by reason of section 1 of Part VII of Schedule V to the Act, the repayment of the principal amount of the XXXXX by the XXXXX to the Holder will be an exempt supply.

J. In the event that a XXXXX of a Holder is redeemed, by reason of section 1 of Part VII of Schedule V to the Act, the surrender of the XXXXX by the Holder to the XXXXX will be an exempt supply.

K. Ruling K has been withdrawn.

Submissions

You have made the following submissions in support of the GST application rulings requested above.

Ruling A

Until such time as a XXXXX is redeemed, the XXXXX XXXXX will be eligible for selection in ongoing periodic XXXXX draws. XXXXX be separated from the XXXXX; therefore, it is your submission that the XXXXX and the XXXXX are inextricably bound up with each other, so as to form a single supply.

The Department's Policy No. P-077, entitled "Single and Multiple Supplies," indicates that the provisions of the relevant documentation are one of the factors to be considered in determining whether a person is making a single supply or multiple supplies. In this regard, the terms and conditions of each XXXXX will set out the inherent right of the Holder of the XXXXX to participate in the XXXXX. Hence, it is your submission that the XXXXX and the right will be supplied together as a single supply.

Ruling B

If the Department takes the position (with which you do not agree) that a sale of a XXXXX and the inherent right to participate in the XXXXX constitutes two supplies, it is your submission that the sale of the right is incidental to the sale of the XXXXX, with the result that section 138 of the Act will deem the right to form part of the XXXXX. In keeping with the approach set out in Policy No. P-159, it is your submission that the primary objective of the XXXXX is to sell the XXXXX and invest the proceeds thereof XXXXX. The provision of the inherent right to participate in the XXXXX (if it is viewed by the Department as being supplied separately from the XXXXX) is merely incidental to the sale of the XXXXX.

Ruling C

If the Department takes the position (with which you do not agree) that a sale of a XXXXX and the inherent right to participate in the XXXXX constitutes two supplies, it is your submission that section 139 of the Act will deem the sale of each of the XXXXX and the right to be a supply of a financial service. In considering the criteria set out in paragraphs (a) through (d) of section 139, it is your submission that:

(a) the XXXXX and the inherent right to participate in the XXXXX will be supplied together for a single consideration;

(b) the XXXXX will be related to the inherent right to participate in the XXXXX; in fact, it will be the terms and conditions of the XXXXX that set out this right;

(c) it will be the usual practice of the XXXXX to supply the XXXXX and the inherent right to participate in the XXXXX together in the ordinary course of the business of the XXXXX in fact, the XXXXX will always supply the XXXXX and the inherent right together; and

(d) the amount that would be the consideration for the XXXXX if it were to be sold separately will be greater than 50% of the total of the amounts that would be the consideration for the XXXXX and the inherent right if they were to be sold separately.

Ruling D

Subsection 153(2) of the Act will apply to a sale of a XXXXX and the inherent right to participate in the XXXXX only if a particular consideration is paid for the XXXXX without the inherent right and other consideration is paid for the right. However, since there will be only a single consideration for the supply of the XXXXX together with the inherent right, it is your submission that subsection 153(2) will not apply to a sale of a XXXXX.

Ruling E

Subsection 1 of Part VII of Schedule V to the Act provides an exemption for a supply of a financial service, which is defined in subsection 123(1) of the Act as including the lending, borrowing, issue or transfer of ownership of a financial instrument. In turn, subsection 123(1) defines a financial instrument as including a debt security, which is defined as meaning a right to be paid money. Accordingly, it is your submission that a XXXXX will be a financial instrument and a sale of a XXXXX (including the inherent right to participate in the XXXXX) will be an exempt supply.

Ruling G

Subsection 123(1) of the Act defines a "financial service" as including the payment of money.

Accordingly, it is your submission that the XXXXX will be an exempt supply.

Ruling H

If a Holder becomes entitled to XXXXX, the right to receive the XXXXX will be a right to be paid money and, thus, will be a "debt security" and a "financial instrument", both as defined in subsection 123(1) of the Act. Accordingly, the surrender of this right in exchange for payment of the XXXXX will be a financial service, i.e., a transfer of ownership of a financial instrument. Accordingly, it is your submission that the surrender of a right to receive a XXXXX will be an exempt supply.

Ruling I

Subsection 123(1) of the Act defines a "financial service" as including the repayment of a financial instrument. Hence, it is your submission that the repayment of a XXXXX will be an exempt supply.

Ruling J

Subsection 123(1) of the Act defines a "financial service" as including the transfer of ownership of a financial instrument. Therefore, it is your submission that, on the repayment of a XXXXX, the surrender of the XXXXX by the Holder thereof to the XXXXX will be an exempt supply.

Rulings Given

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

Ruling A

The Department does not consider the supply of the XXXXX and the right to participate in the XXXXX to be a single supply.

Ruling B

The Department does not consider the supply of the right to participate in the XXXXX to be incidental to the supply of the XXXXX.

Ruling C

Pursuant to section 139 of the Act, the supply of the XXXXX and the right to participate in the XXXXX shall be deemed to be a supply of a financial service.

Section 139 of the Act reads:

Financial services in mixed supply - For the purposes of this Part, where

(a) one or more financial services are supplied together with one or more other services that are not financial services, or with properties that are not capital properties of the supplier, for a single consideration,

(b) the financial services are related to the other services or the properties, as the case may be,

(c) it is the usual practice of the supplier to supply those or similar services, or those or similar properties and services, together in the ordinary course of the business of the supplier, and

(d) the total of all amounts, each of which would be the consideration for a financial service so supplied if that financial service had been supplied separately, is greater than 50% of the total of all amounts, each of which would be the consideration for a service or property so supplied if that service or property had been supplied separately, the supply of each of the services and properties shall be deemed to be a supply of a financial service.

The XXXXX offered by the XXXXX based solely on the information contained in the submission (as XXXXX agreements have not yet been drafted), would meet the definition of "debt security" in subsection 123(1) of the Act. Consequently, the XXXXX are considered to be a "financial instrument", the supply of which is considered a supply of a "financial service" as those terms are defined in subsection 123(1) of the Act. The XXXXX, and the right to participate in the XXXXX (an intangible property) is supplied for a single consideration (the face value of the XXXXX). Therefore, paragraph 139(a) is met.

The financial service is related to the intangible property given that the right to participate in the XXXXX is present only while the XXXXX is held by the XXXXX holder. Therefore, paragraph 139(b) is met.

It will be the XXXXX usual practice to supply the XXXXX and the right to participate in the XXXXX together in the ordinary course of the business of the XXXXX[.] Therefore, paragraph 139(c) is met.

Given that the face value of the XXXXX is equal to the consideration that will be paid for the XXXXX and the right to participate in the XXXXX, the consideration for the financial service is greater than 50% of the total (in fact, it represents the entire amount). Therefore, paragraph 139(d) is met.

Ruling D

Subsection 153(2) of the Act does not apply since there is only one consideration for both the supply of the XXXXX and for the supply of the right to participate in the XXXXX.

Ruling E

Pursuant to section 1 of Part VII of Schedule V to the Act, the sale of the XXXXX by the XXXXX is an exempt supply. The XXXXX offered by the XXXXX based solely on the information contained in the submission (as XXXXX agreements have not yet been drafted) would meet the definition of "debt security" in subsection 123(1) of the Act. Consequently, the XXXXX are considered to be a "financial instrument", the supply of which is considered a supply of a "financial service" as those terms are defined in subsection 123(1) of the Act.

Rulings G and H

The payment of a XXXXX by the XXXXX to the XXXXX winner is not considered a supply. Money is excluded from the definitions of "service" and "property" in subsection 123(1) of the Act. The payment of a XXXXX is not consideration for the surrendering of a right to XXXXX[.] A XXXXX XXXXX already has the right to the XXXXX by virtue of the right to participate in the XXXXX.

Rulings I and J

In the event that a XXXXX holder redeems his/her XXXXX, the redemption of the XXXXX by the person and the payment of the principal amount of the XXXXX by the XXXXX to the person is an exempt supply pursuant to section 1 of Part VII of Schedule V to the Act.

Although the statement of facts indicates that the XXXXX was incorporated as a not-for-profit limited company under Part 9 of the Companies Act, R.S.A. 1980, c. C-20, these rulings do not address whether the XXXXX is an non-profit organization for purposes of the Act since the request for that ruling has been withdrawn. By providing these rulings, the Department is not in any way expressing an opinion as to whether the XXXXX has the right to conduct the XXXXX. Whether the XXXXX[.]

These rulings are 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 these rulings 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 do not hesitate to contact me at (613) 957-8222.

Yours truly,

Tim A. Krawchuk
Rulings Officer
Financial Institutions Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate

Legislative References:           Subsection 123(1) - "debt security", "financial instrument", "financial service", Section 139