17 November 2000 GST/HST Interpretation 25599 - Royalty Payments, Purchase of Landfill Site

Dear XXXXX:

Thank you for your letter of December 20, 1999, concerning the application of the Goods and Services Tax (GST) to the purchase of a landfill site by the City of XXXXX. As you know, your letter was forwarded by the XXXXX XXXXX XXXXX to our office for reply. Please accept our apology for the delay in responding to your query.

Our understanding of the situation is as follows, based upon documents submitted by you and telephone conversations between yourself and either XXXXX of this office or the undersigned.

1. The City of XXXXX (the City) is a municipality as defined in subsection 123(1) of the Excise Tax Act (ETA). The City is registered for the GST under Business Number XXXXX.

2. On XXXXX, the City entered into XXXXX (the Agreement) with XXXXX to purchase certain lands and assets used in the operation of a landfill site. The closing date for the transaction was XXXXX. We will refer to XXXXX as the Vendors. XXXXX and XXXXX are corporations, while XXXXX is an individual.

3. In referencing the Agreement, we have used the same titles for headings and sub-headings as found in that document, i.e. 'article', 'section' and 'subsection'. All references in this letter to those terms and to specific schedules relate to that Agreement unless otherwise noted.

4. Under an Operating Agreement dated XXXXX between XXXXX and the City, XXXXX agreed to operate the Landfill for an initial term of XXXXX years. (We have not been provided with a copy of this agreement).

5. "Assets" is defined in XXXXX to mean the personal property set out in XXXXX and the "Owned Premises". XXXXX lists "Assets Being Purchased" (assets) as being all buildings and improvements situated on the Owned Premises (defined in XXXXX) as the land and buildings owned by XXXXX and more particularly described in XXXXX (Title Report - The Lands).

6. XXXXX, 'Included Assets', states that XXXXX and XXXXX shall transfer to the Purchaser all assets used in the operation of the business, including the shop building, all contracts of customers, and all licences required for the operation of the business.

7. XXXXX, Barristers and Solicitors (whom we understand to represent the Vendors) have provided to you the following allocation of the proceeds of the subject sale: ^[i]1

1. XXXXX states that the purchase price is the aggregate of $ XXXXX, minus specified possible outstanding indebtedness owing by XXXXX.

2. XXXXX provides that the City shall pay to XXXXX, in addition to the purchase price, XXXXX dollars ($ XXXXX) for each metric tonne of waste received at the landfill operating on the Owned Premises for the remaining life of the landfill.

3. At the time of closing, the City and one of the vendors, XXXXX, entered into a royalty agreement at XXXXX. XXXXX states that the City agreed to pay a royalty of $ XXXXX per metric tonne of waste to XXXXX as partial consideration for the sale of certain assets from XXXXX to the City. The nature of those certain assets is not defined.

4. The royalty agreement is binding on all subsequent owners of the landfill site and was registered on title by means of a caveat as a specific charge on and interest in the "Lands". "Lands" is defined at XXXXX as the lands, buildings, premises and landfill site owned by the City. The legal description of the Lands provided at XXXXX corresponds to the legal description of Owned Premises contained in XXXXX. XXXXX XXXXX specifies that the royalty agreement constitutes a first charge on and interest in the Lands (subject to permitted encumbrances) and the charge is security for the due and punctual payment of all monies due by the City to XXXXX under the royalty agreement.

5. In your letter of XXXXX to the XXXXX, you indicated that the royalty of $ XXXXX per metric tonne of waste represents the purchase of the future capacity of the landfill airspace over its useful life.

6. XXXXX states that all federal taxes incurred in connection with the transfer of business assets "... shall be paid by XXXXX and XXXXX and XXXXX and XXXXX and XXXXX shall jointly and severally indemnify the Purchaser from any liability therefor".

7. The City has not self-assessed for any GST due on the subject purchase. The City considers the purchase as tax-included and has claimed neither input tax credits (ITCs) nor a Public Service Body (PSB) rebate in connection with the purchase.

8. No election is in place under section 167 of the ETA regarding the supply of the subject assets.

9. None of the Vendors is a public service body. ^[ii]2 We understand that the Vendors carried on a private, for-profit landfill operation.

Interpretation Requested

You have requested a ruling as to whether or not the royalties payable by the City are subject to GST.

Based on the information provided, we have insufficient facts to issue a ruling. In order to be more specific in our comments, we would require particulars on the status and relationship of the Vendors. For example, are any of the Vendors a non-registrant ^[iii]3 for GST purposes? What was the proportionate interest of each Vendor in each asset, and how was title held? Is there a partnership arrangement or a trust agreement in place between any of the Vendors? As one of the Vendors is an individual, how did he use the subject real property? (Please see our comments on page 5 regarding the supply of real property by an individual).

In our discussion, we have treated each of the Vendors as holding an undivided interest in the subject property, such as tenants in common enjoy in real property. Further to this, we have considered each Vendor as a separate person for GST purposes. If the facts of the situation do not support these assumptions, then our comments would differ from those provided.

In addition we have assumed that none of the Vendors is a PSB for purposes of the ETA. If in fact one or more of the Vendors is a PSB, this office should be contacted for information on special rules that apply only to PSBs.

Additionally, there appear to be some discrepancies in the provided documentation. These discrepancies would need to be clarified to assist in the analysis of the subject transactions. For example, Item # 2 above indicates that the royalty payment is due to XXXXX, while item # 3 shows that the payment is due to XXXXX.

For purposes of our discussion, we will consider that land, buildings, a landfill permit and long-term customer contracts were transferred from the Vendors to the City under the Agreement. ^[iv]4

While we cannot issue a ruling at this time, we are pleased to provide the following interpretation. All legislative references contained in the interpretation are to the ETA.

Interpretation Provided

Status of the Royalty Payments - to the Extent That They Relate to Real Property

The general rule as provided under subsection 165(1) requires the calculation of GST based on the current rate of 7% on the value of the consideration for the supply. We will treat the subject royalty payments as part of the consideration payable by the municipality for its purchase of the landfill operation. This treatment is supported by the references to the royalty payment as being "... in addition to the purchase price ..." (item # 2) and "... partial consideration ..." (item # 3).

The supply of real property (such as land and buildings) is generally GST taxable unless exempted by a provision of Part I of Schedule V. Based on the information provided, the supply of the corporations' interest in the subject real property would be subject to tax as there are no provisions to exempt the supply.

The supply of the individual vendor's interest in the real property will also be subject to tax unless the supply is exempt under section 9 of Part I of Schedule V. Subsection 9(2) exempts a sale of real property by an individual or a personal trust except under certain conditions, including:

where the real property, immediately before the time ownership or possession of the property is transferred, is capital property used primarily in a business carried on by the individual with a reasonable expectation of profit; or a supply of real property made in the course of a business of the individual or, where the individual has filed an election, in the course of an adventure or concern in the nature of trade of the individual.

Accordingly, the payments described as royalties would be subject to GST to the extent that they are consideration for the taxable purchase of real property.

Status of the Royalty Payments - to the Extent That They Relate to the Landfill Permit and Customer Contracts

To determine the tax status of that portion of the royalty payments that relate to the other components of the sale, the tax status of the landfill permit and the long-term customer contracts would need to be determined. Based on the information provided, the sale of those assets would be a taxable supply. Accordingly, GST would be due on the payments described as royalties to the extent that they are consideration for the non-real property portion of the subject sale.

Small Suppliers

Under section 166, small suppliers ^[v]5 who are not registrants are not required to charge nor to collect GST on their taxable supplies, except when they make a taxable sale of real property.

Accordingly, if any of the Vendors is a small supplier who is not registered for the GST, then no GST would be due on the portion of the royalty payment that relates to that Vendor's interest in the assets sold that are not real property.

Apportionment of Tax

Subsection 153(2) applies where consideration is paid for a supply and other consideration is paid for one or more other supplies, and the consideration for one of the supplies exceeds the amount that would be reasonable if the other supply were not made. In these circumstances, a reasonable allocation of the total consideration will be deemed to be made in respect of the various supplies.

In the subject case, we have no evidence that there has been an unreasonable apportionment of the consideration between the supplies. We have provided you with this information simply to assist you in the allocation of the royalty payments between the real property component and the other components of the sale.

Disclosure of Tax

Subsection 223(1) requires the registrant supplier of taxable goods or services to disclose the GST payable for the supply. Where the tax is charged on a tax-extra basis, the registrant must clearly indicate the amount of the tax payable in respect of the supply. Where the tax is included in the amount charged for the supply, the registrant must indicate that the amount charged includes the tax payable in respect of the supply.

The question of whether the price paid for a supply included GST is generally a matter to be determined between the vendor and the purchaser. Canada Customs and Revenue Agency policy papers P-116 Collection of GST, By a Supplier, Where the Invoice is Silent on the Tax Payable and P-118 Assessments on a Tax-Extra or Tax-Included Basis are enclosed to provide you with more detailed information in this regard.

Tax Paid in Error

If a supplier collects an amount as GST in error, the supplier must include that amount in the net tax calculation for the reporting period in which it was collected. The supplier may refund or credit to the purchaser the amount collected in error, and then take a corresponding deduction in its net tax for the reporting period in which the credit note is issued. If the purchaser is unable to obtain a refund or credit from the supplier, the purchaser may apply for a rebate of an amount paid in error as GST, pursuant to section 261. The purchaser is not entitled to either a PSB rebate or to an ITC in connection with the amount paid in error.

Remittance of Tax on Purchase of Real Property

Generally, subsection 221(1) requires the person making a taxable supply to collect the GST payable from the recipient of the supply.

However, paragraph 221(2)(b) provides that the maker of a taxable supply of real property is not required to collect GST payable by the recipient of the property, if the recipient is registered for the GST (excluding situations where an individual is buying a residential complex).

Further, paragraph 228(4) requires that in such cases the recipient must pay the tax to the Receiver General. Registrants who are required to self-assess tax on a taxable acquisition of real property and who are using or supplying the property primarily (more than 50%) in the course of commercial activities should report the tax on their regular GST return for the reporting period in which the tax became payable. At the same time, the registrant may of course claim any ITCs to which they are entitled (under section 169) on the purchase of the property.

All other persons use form GST 60, Goods and Services Tax/Harmonized Sales Tax Return for Acquisition of Real Property, to report and pay the tax, and must file the return on or before the last day of the calendar month following the month in which the tax became payable. Pursuant to subsection 169(4), an ITC relating to the purchase of the real property may not be claimed until the GST 60 form has been filed.

In either case, pursuant to subsection 228(6), the registrant may offset any tax remittable by the amount of any net tax refund or rebate claimed by that person in another return or application (such as the GST/HST Rebate Application for Public Service Bodies). To apply the offset, the two forms must be filed together.

If the recipient pays an amount as tax to the supplier in error, the obligation to self-assess the GST under subsection 228(4) is not relieved.

The foregoing comments represent our general views with respect to the subject matter of your letter. 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 Canada Customs and Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at telephone number (613) 957-8222.

Yours truly,

(Mrs.) S.C. Cahill
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate