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HQR0001567March 24, 1999
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TO:
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XXXXX
XXXXX
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FROM:
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Isabelle Breault
Goods Unit
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Subject:
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Cow/calf leasing arrangements
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Thank you for your facsimile of January 29, 1999 concerning the application of the GST/HST to cow/calf leasing arrangements.
You provide the following scenarios concerning cow/calf arrangements between different parties.
Scenario A
Party A owns cows and rents them to Party B.
Party B houses, supplies the feed and vaccinations, pays the veterinarian for services provided and calves out the cows.
Party B pays Party A a certain lease amount for each cow.
Party A retains ownership of the cows.
Scenario B
Party A owns cows and rents them to Party B.
Party B houses, supplies the feed and vaccinations, pays the veterinarian for services provided and calves out the cows.
Party B sells the calves from the cows and gives Party A 1/3 of the proceeds of the sale.
Party A retains ownership of the cows.
You have requested that we review these scenarios and qualify them as supply of a lease of livestock or as a supply of a service of looking after cow/calves. Also, you have requested that we provide factors which would point out to whether the supply is a lease or a service.
Please note that all legislative references refer to provisions in the Excise Tax Act (ETA).
If it is determined that a supply is a lease of livestock pursuant to section 136 where the use or right to use tangible personal property is supplied by way of lease, licence or similar arrangement the supply is deemed to be a supply of tangible personal property. Section 1 of Part IV of Schedule VI, provides that a supply of farm livestock (such as cow/calves) that are ordinarily raised or kept to produce, or to be used as food for human consumption is zero-rated. Therefore the lease of the livestock would be zero-rated pursuant to section 1 of Part IV of Schedule VI.
However, if the supply is a supply of a service, then the supply is taxable at 7/15%.
The concept of lease is not defined in the ETA. However, Policy P-062 Distinction between lease, licence and similar arrangement determines the concept of lease in the context of real property. The application of the concept of lease is similar in a situation of tangible personal property. According to P-062, in the common law provinces, it has generally been determined that a lease normally confers a right of exclusive possession even when the right is subject to some limits, such as restrictions on the use to which a property may be put. Also, a lease generally confers an interest in the real property, binding on the property owner and on other persons. Also, the concept of lease, when used with reference to tangible personal property, is defined in Deluxe Black's Law Dictionary as a contract by which one owning such property grants to another the right to possess, use and enjoy it for a specified period of time in exchange for periodic payment of a stipulated price referred to as a rent.
Section 123 defines service as anything other than property or money and anything that is supplied to an employer by a person who is or agrees to become an employee of the employer in the course of or in relation to the office or employment of that person.
To determine if the transaction between parties is a lease or a service, reference would have to be made to the original contract between the parties involved and the general spirit of the contract.
Although exclusive possession is usually a hallmark of a lease, it may not always be sufficient to characterize the transaction in question as a simple leasing arrangement. This is especially true in the cow/calf context where the operator is always going to have exclusive possession of the cows regardless of the other conditions of the contract. Thus it is of assistance to consider other factors in characterizing the transaction.
An important factor may be the way in which the terms of payment are structured. Where the operator pays a fixed amount of money or a fixed number of calves to the owner this may indicate that a lease is all that the parties intended.
At the other extreme, where the owner pays to the operator a fixed amount in cash or a fixed number of calves this could indicate that the operator is simply providing a service to the owner.
In between these two extremes are transactions that could be construed either way. Each of those cases may turn on specific facts including agreements as to who is entitled to payment upon the sale of the calves, and whether the payment is fixed or variable in nature.
For a general understanding of the application of these concepts to various arrangements, each of which may be referred to in the agricultural sector as "cow/calf leasing", we have set out below some general scenarios and the application of the GST/HST to each scenario.
Scenario 1
Owner provides cows to Operator.
Owner retains ownership of the cows.
Operator pays Owner a fixed amount for use of cows.
Operator houses, feeds, vaccinates and provides veterinary services to cows.
Operator owns all calves produced from these cows.
Operator sells calves and retains all proceeds from the sale.
The payment of a fixed amount from the Operator to Owner, is viewed as consideration for the lease of zero-rated farm livestock pursuant to the operation of subsection 136(1) and section 1 of Part IV of Schedule VI.
Scenario 2
Owner provides cows to Operator.
Owner retains ownership of the cows.
Operator houses, feeds, vaccinates and provides veterinary services to cows.
Operator owns all calves produced from these cows.
Calves are sold and cheque is cut in Operator's name.
Operator shares in proceeds with Owner.
The payment by the Operator to the Owner is a similar arrangement to a lease payment. Pursuant to the operation of subsection 136(1) of the ETA and section 1 of Part IV of Schedule VI, a lease payment for a farm livestock is zero-rated.
Scenario 3
Owner provides cows to Operator.
Owner retains ownership of the cows.
Operator houses, feeds, vaccinates and provides veterinary services to cows.
Agreement states that a fixed number of calves belong to Owner. Any calves born over this fixed number become the property of Operator.
Owner and Operator separately dispose of their own calves.
In this case, the Owner receives from the Operator a predetermined number of calves as rent. The calves represent consideration for the lease of zero-rated farm livestock pursuant to the operation of subsection 136(1) and section 1 Part IV of Schedule VI.
Scenario 4
Owner provides cows to Operator.
Owner retains the ownership of the cows.
Operator houses, feeds, vaccinates, and provides veterinary services to cows.
Agreement states that calves born during the time the Operator is caring for the cows become the property of the Owner and the Operator jointly.
Calves are sold and proceeds are split between the Owner and the Operator based on a predetermined percentage.
In this case, the transaction is a joint undertaking between the Owner and the Operator. The Owner contributes by providing cows and the Operator contributes to the undertaking by looking after the cows. Such an undertaking may be in the form of a partnership or a joint venture. At the end they split the revenue based on a predetermined percentage.
Scenario 5
Owner provides cows to Operator.
Owner retains ownership of cows.
Operator houses, feeds, vaccinates and provides veterinary services to cows.
Owners owns all calves produced from these cows.
Calves are sold and cheque is cut in Owner's name.
Owner shares in proceeds with Operator.
The sharing of the proceeds between the Owner and the Operator is viewed as a payment of consideration for a taxable service (housing, feeding, vaccination and veterinary services to cows) and is therefore subject to 7/15% GST/HST. Note that the feedlot rules may apply to the feed portion of this scenario.
Scenario 6
Owner provides cows to Operator.
Owner retains ownership of cows.
Operator houses, feeds, vaccinates and provides veterinary services to cows.
Owner pays a fixed amount to the Operator as consideration.
Owners owns all calves produced from these cows.
Calves are sold and cheque is cut in Owner's name.
The payment of a fixed amount by the Owner to the Operator is viewed as a payment of consideration for a taxable service (housing, feeding, vaccination and veterinary services to cows) and is therefore subject to 7/15% GST/HST. Note that the feedlot rules may apply to the feed portion of this scenario.
In all of the above scenarios, the sale of calves, is a zero-rated supply of farm livestock pursuant to section 1 of Part IV of Schedule VI.
Should you have any further questions or required clarification on the above matter, please do not hesitate to contact me at (613) 952-8812.
Isabelle Breault
Goods Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate
| Legislative References: |
s. 136 ETA
s. 1 Part IV Sch VI to ETA |
| NCS Subject Code(s): |
11845 |
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