2 June 1998 GST/HST Ruling HQR0000368 - on the Activities of

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

XXXXX

Case: HQR0000368  XXXXX                June 2, 1998

Subject:

GST/HST APPLICATION RULING Activities of XXXXX

Dear XXXXX

On June 30, 1996, you sent a letter to the XXXXX Tax Services Office concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the activities of the cattle feeder co-operative XXXXX . As requested by the XXXXX Tax Services Office, you sent in additional information in December 1997. Where possible, a ruling has been provided.

Our understanding of the facts, the transactions, and the purpose of the transactions pursuant to the information received in writing and during our telephone conversations is as follows.

Statement of Facts

•   The XXXXX was established in 19 xx to facilitate the establishment of cattle feeder associations. The name of the program has since been changed to XXXXX The government guarantee and XXXXX assurance fund provides added confidence to lenders to provide loans for the purchase of cattle.

•   The Government of XXXXX guarantees to the bank repayment of XXXXX of the amount outstanding on the loan at the time of a first default on any advance, plus accrued interest as of the time that payment is to be made.

•   XXXXX an incorporated non-profit organization that operates in the Province of XXXXX is registered with the XXXXX

•   XXXXX which qualifies as a producer association under the XXXXX offers farmers an alternative method of financing cattle for growing and finishing purposes.

•   XXXXX has approximately XXXXX members.

•   The main purpose of the XXXXX is to provide farmers with an alternative method of financing cattle acquired for growing and finishing.

•   In order for XXXXX to obtain a loan from the bank, XXXXX must provide the bank with a purchase agreement for the cattle.

•   While XXXXX retains legal ownership of the cattle, the members and the feedlot operator, not XXXXX make all decisions and arrangements relative to livestock purchases, management, and sales.

•   Proceeds from the sale of the cattle are paid directly to XXXXX which agrees, pursuant to the signed agreement, to pay the net amount to the member or the feedlot operator, after deducting any amounts the member owed to XXXXX reports in its books only loans receivable and loans payable. XXXXX does not report any inventory of cattle or assets.

Pursuant to section 59 of the XXXXX is required to maintain an assurance fund for each cattle purchased by its members. The assurance fund which is deposited in a collateral bank account must be used solely to pay the debts with respect to the purchase of cattle that are due to a financial institution that cannot otherwise be paid. The assurance fund is refundable to the member provided it has not been used to offset the unpaid loan or it can be used as an assurance fund for another loan the member may apply for.

•   The main sources of revenue for XXXXX are the XXXXX association fee charged to the feedlot operator, the one time XXXXX fee and the interest earned from the insurance money paid by the feeders and the home breeder members.

As a member of the XXXXX a farmer can obtain a loan on short notice and benefit from interest rates which are competitive or better than rates available on an individual basis.

•   Subsection 4(4) of the XXXXX and subsection 5(4) of the XXXXX prescribe the amount a qualified producer association may borrow with respect to a request for a loan received from a member.

 XXXXX has XXXXX of members:

1. XXXXX

•   These members are likely GST registrants who acquire pregnant cows and young calves for breeding purposes. They must find the cattle, purchase them through a licensed dealer "broker" and sell them when ready for market.

•   XXXXX are required, pursuant to subsection 15(2) of the XXXXX to deposit with XXXXX an amount referred to as an "assurance fund" equal to XXXXX of the money borrowed. They must repay the loan over a XXXXX period, the loan payment being equal to the principal and interest charged by the financial institution.

2. XXXXX

•   These members are likely GST registrants who acquire calves that will be ready for market within six months to one year of the acquisition. They must find the cattle, purchase them through a licensed dealer "broker" and sell them when ready for market.

•   In the case of the XXXXX , the repayment of the loan is not due until the cattle are sold, which must be within the period prescribed under the XXXXX . Also, pursuant to subsection 15(2) of the XXXXX , they are required to deposit with XXXXX an amount referred to as an "assurance fund" equal to XXXXX of the money borrowed.

 XXXXX e XXXXX will be discussed on page 5.

Agreements

•   The agreements signed between the Members and XXXXX state that the members agree that XXXXX is the owner of the cattle and that the members shall not have the right to use the cattle as collateral or security or encumber title thereto in any manner whatsoever. In other words, the cattle are purchased in the name of XXXXX and they must have XXXXX brand (which is usually an indication of ownership in the cattle industry). XXXXX retains legal ownership of the animals at all times or until the loan is paid off.

•   The member also agrees to maintain the health of the cattle and to pay all related costs.

•   Both types of members assume the risks of ownership. Members are responsible for repaying the loan in a case of loss of cattle. The members are also responsible for insurance coverage.

•   All expenses associated with the purchase and sale of the cattle are incurred in the name of XXXXX (i.e., broker's commissions, freight, straw, etc.). When the cattle are purchased, the member must ensure that the purchase document for the cattle names XXXXX as owner of the cattle and identifies the member's name.

•   When the cattle are sold, the purchaser pays XXXXX who then provides the member with the net proceeds. XXXXX deducts the following amount from the gross proceeds:

 XXXXX charges the members a supervisor fee to cover the cost of a supervisor XXXXX paid to inspect the cattle over the period of the loan. The fee is based on the number of cattle purchased under the loan.

•   When members repay the loan, the loan payments are equal to the principal and interest charged by the financial institution. Again, contrary to the information available in the memorandum of October 17, 1997, the members are not charged a XXXXX fee for administrative services related to the loan.

•   Contrary to the information provided in the memorandum dated October 17, 1997, the members are not required to pay XXXXX an annual membership fee of XXXXX The members are required to pay to XXXXX a one time fee of XXXXX at the time they register as a member. XXXXX charges this XXXXX fee to cover its administrative costs related to applying for a loan to the financial institution on behalf of the member.

 XXXXX may allocate, on an annual basis, to its members a portion of the investment income earned from the deposited amount of assurance fund money. However, such investment earnings are distributed to the members only when such earnings exceed the administrative expenses incurred by XXXXX

•   These members are individuals investors (often non registrants). Upon membership, an investor is required to grant a power of attorney to XXXXX that will permit XXXXX to borrow money on behalf of the investor. The money is provided to a large feedlot operator who is responsible to purchase and care for the cattle until they are sold. Again, the cattle are purchased in the name of XXXXX and must have XXXXX brand (which is usually an indication of ownership in the cattle industry). XXXXX retains legal ownership of the animals at all times or until the loan is paid off.

 XXXXX generally deals with one feedlot operator who is not a member of XXXXX The feedlot operator locates, purchases and sells the cattle. The loans are usually in XXXXX units (depending on the money invested by each investor, there may be one or more investors attached to each loan unit). The feedlot operator generally purchases between XXXXX to XXXXX head of cattle.

•   The agreement between XXXXX and the feedlot operator is such that all of the risks of ownership in the cattle are with the feedlot operator.

•   The feedlot operator feeds the cattle until they are ready for market and are not paid anything for their services until the cattle are sold. Upon selling the cattle, the feedlot operator receives from XXXXX the excess funds after the loan principal, bank interest on the loan and a XXXXX surcharge have been deducted. The XXXXX surcharge called an "association fee" represents the profit that is paid by XXXXX to the investors. The excess funds the XXXXX pays to the feedlot operators are paid as "feed".

•   Twice a year, the members receive a profit allocation. The profit allocation is made up of any association fees earned plus the interest earned on the members assurance money (less any administrative costs incurred by XXXXX Members:

(a) For GST purposes, who is considered to be the "recipient" of the supply of the cattle when they are initially purchase through the broker - XXXXX or the member? Who is considered to be the "supplier" of the cattle when they are subsequently sold?

(b) When the cattle are purchased, who is eligible to claim ITCs in respect of the commission, freight and other cost incurred at that time (the invoices from the brokers in respect of these expenses are in the name of XXXXX or the member (depending on who is considered the supplier) required to charge and collect GST on any portion of the sale of the cattle?

(d) What is the tax status of the XXXXX administrative fee charged to the breeder and home feeder members? Note: This question does not need to be addressed because it has been determined that the members are not charged a xx administration fee.

(e) What is the tax status of the supervisor's fee charged by XXXXX to the members?

(f) What is the tax status of the initial XXXXX membership fee?

(g) What is the tax status of the annual amount paid to members by XXXXX on investment earnings?

2. XXXXX

(a) For GST purposes, who is considered to be the "recipient" of the supply of the cattle when they are initially purchased through the broker, XXXXX the individual group feeders or the feedlot operator? Who is considered to be the "supplier" of the cattle when they are subsequently sold?

(b) When the cattle are purchased, who is eligible to claim an ITC in respect of the commissions, freight, straw and other costs incurred at that time (the invoices from the brokers in respect of these expenses are in the name of XXXXX

(c) When the cattle are ultimately sold and the settlement made to the feedlot operator, what, if any, portion of the proceeds are subject to the GST (i.e., is GST applicable to the loan principal, bank interest or association fee that is deducted from the proceeds of the sale)?

(d) Is the feedlot operator required to charge and collect GST on the settlement amount it receives in respect of "feed"?

(e) What is the tax status of the profit allocations that are paid annually by XXXXX to the group feeders?

Ruling Given

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

1. XXXXX

(a) The home feeder members and the breeder members are considered the recipients of the supply of the cattle when they first acquire the cattle under the name of XXXXX The home feeder members and the breeder members are also considered the suppliers of the cattle when they are ready for market and sold.

(b) When registered for GST purposes, the home feeder members and the breeder members would be the persons eligible to claim an input tax credit in respect of the amount of tax payable for properties or services acquired for consumption, use or supply exclusively in the course of their commercial activities. The registrants must meet the documentary and information requirements in order to be eligible to claim an ITC.

(c) The members, when selling the cattle ready for market, are not required to charge GST since they are making a zero-rated supply pursuant to section 1 of Part IV of Schedule VI to the Excise Tax Act (the Act). Note that the supply of the cattle is zero-rated even if the XXXXX was considered the supplier.

(d) No longer an issue to be addressed and ruled on.

(e) Pursuant to section 44 of the XXXXX , XXXXX must hire a local supervisor to inspect the cattle. The supervisor, a GST registrant, charges GST when invoicing XXXXX the legal owner of the cattle. Once the cattle are sold, the proceeds are sent to XXXXX The members must reimburse XXXXX the principal and the interest on the loan, as well as the amount paid to the supervisor.

When a person makes a supply and incurs expenses for which the person is reimbursed by the recipient of the supply, the reimbursement is deemed to be part of the payment for the supply, except if the expenses were incurred by a person acting as the agent of the recipient. Essentially, XXXXX incurs such expenses in providing the exempt financial service of lending money.

 XXXXX a GST registrant, will not be eligible to claim an ITC with respect to GST paid to the supervisor for his services because the supervisor's services have not been acquired by XXXXX for consumption, use or supply in the course of a commercial activity.

(f) The information submitted was not sufficient for us to provide a ruling on the tax status of the one time XXXXX fee paid by the members to XXXXX However, we have provided, at the end of the letter, an interpretation on this issue.

(g) XXXXX pays an amount once a year to the members when the investment earnings from the deposited assurance fund money exceed its administrative expenses. This annual amount paid to members is considered the distribution of the proceeds and is therefore not consideration for the supply of a service. GST does not apply to the amount paid to members as investment earning on the assurance fund money.

2. XXXXX :

(a) For GST purposes, the feedlot operator is considered the recipient of the cattle when the cattle are acquired under the name of XXXXX The feedlot operator is also considered the supplier of the cattle when they are ready for market and sold.

(b) The feedlot operator is considered the supplier of the cattle when they are sold. When registered for GST purposes, the feedlot operator would be the person eligible to claim an input tax credit in respect of the amount of tax payable for property or services acquired for consumption, use or supply exclusively in the course of their commercial activities. It is important to keep in mind that the registrants must meet the documentary and information requirements pursuant to subsection 169(4) of the Act.

(c) Pursuant to section 1 of Part IV of Schedule VI to the Act, the supply of farm livestock (other than rabbits), that are ordinarily raised or kept to produce, or to be used as, food for human consumption is zero-rated. Therefore, the feedlot operator when selling the cattle ready for market, is not required to charge GST since the feedlot operator is making a zero-rated supply pursuant to section 1 of Part IV of Schedule VI to the Act. Note that the supply of the cattle is zero-rated even if the XXXXX was considered the supplier.

(d) XXXXX whose main purpose is to provide farmers with an alternative method of financing, is considered a listed financial institution under subparagraph 149(1)(a)(viii) of the Act. The XXXXX association fee charged by XXXXX to the feedlot operator represents an amount charged for the processing of a financial instrument and it is GST exempt. XXXXX does not supply any other services to the feedlot operators other than the supply of a financial service.

On April 1, 1997, the harmonized sales tax (HST) replaced the goods and services tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%. If you supply goods or services that are delivered or made available in a participating province, to the extent that they are taxable supplies (which are not zero-rated), tax must be collected at the harmonized rate.

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.

Interpretation

1. (f) What is the tax status of the XXXXX fee paid by the members?

The members are required to pay a one time fee of XXXXX when they register as a member. XXXXX charges such a fee to cover its administration costs relating to applying for a loan on behalf of the member.

Without referring to the XXXXX by-laws, it is not possible to determine whether this one time fee is an amount paid as membership fee or as an administration fee.

Pursuant to section 17 of Part VI of Schedule V to the ETA, membership in a non-profit organization (other than membership in a club the main purpose of which is to provide dining, recreational, or sporting facilities) is exempt unless members receive benefits other than "allowable" benefits listed under that section.

Although you have indicated that XXXXX is incorporated as a non-profit organization, we have not ruled on this matter. The fact that investment income from assurance funds may be distributed to members causes some concern that XXXXX may not fall within the meaning of "non-profit organization" set out in subsection 123(1) of the Act. Nevertheless, if the XXXXX fee was regarded as a membership fee it would likely be taxable whether or not XXXXX was regarded as a non-profit organization due to the benefits accruing to its members.

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/HST 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 matter, please do not hesitate to contact me at (613) 952-8812.

Yours truly,

Mariette Leblanc
A/Ruling Officer
Industries Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate

c.c.:      A. Venne

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