17 November 1993 GST/HST Interpretation 1993-11-17 - Tax Status of Payments Made for the Supply of Capacity Power Generated by Electricity

                                                                        November 17, 1993

This is in reply to your correspondence of February 26, 1993 with documents attached wherein you request our comments on a grant from XXXXX to the XXXXX

Summary

The XXXXX has entered into an agreement with XXXXX whereby the XXXXX will install cogeneration facilities to produce electricity, while XXXXX has agreed to provide the XXXXX an annual grant.

It is our understanding that the XXXXX is expecting to reduce its purchase of electricity from XXXXX, thereby resulting in lower production costs for XXXXX However, the XXXXX is not prevented from buying required electricity from XXXXX, should its demand exceed its production.

You are inquiring as to the GST status of the payment made by XXXXX to the XXXXX

Department's position[Tax Status of Payments Made for the Supply of Capacity Power Generated by Electricity]

To respond to your question, it is necessary to determine whether the payment made by XXXXX to the XXXXX is consideration in respect of a supply and, if there is a supply, is it made in the course of a commercial activity?

Section x of the Performance Payment Agreement states, XXXXX shall pay for Capacity Power generated by the Generator. ... These payments over the twenty year term of this Agreement reflect the full economic value of Capacity Power to XXXXX...".

Capacity Power under the Agreement means the electrical power, including electrical energy generated by the Generating Facility for exclusive use by the Generator who is the Governing Council of the XXXXX

Pursuant to subsection 123(1) of the Excise Tax Act (the "Act"), the definition of supply "means, the provision of property or service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition". That subsection further defines service as,

"... anything other than(a) property,(b) money, and(c) anything that is supplied to an employer by a person who is or agrees to become an employee of the employer in the course or in relation to the office of employment of that person."

In this particular situation, the grantor receives a direct benefit (lower production cost) derived from the provision of these funds given to the grantee. More specifically, by agreeing to build a cogeneration facility and supply the majority of its own electrical power needs, the XXXXX can be said to be providing a service to XXXXX. Further, the grants in question were the inducement for providing such a service and could therefore be said to constitute consideration for this supply.

However the XXXXX is a registered charity and in accordance with section 2 of Part VI of Schedule V to the Act, supplies of personal property and services provided by charities are exempt from GST unless specifically identified as being taxable. The supply of "Capacity Power" is considered the supply of a service which is not specifically identified in the Act as taxable when supplied by a charity, and therefore is not subject to GST.

I hope that the above information is of use to you. If you have any questions or require additional information please contact Mitch Bloom of my staff at (613) 952-8816 or Gabrielle Nadeau at (613) 954-7931.

H.L. Jones
Director
General Tax Policy
Policy and Legislation

REG (506)