6 January 2000 GST/HST Interpretation 8340/HQR0001946 - Election under Subsection 167(1) of the ETA

Dear XXXXX

Thank you for your facsimile letter of September 3, 1999 (with attachments) concerning the application of subsection 167(1) of the Excise Tax Act (the "Act") to the sale of a franchise business by a franchisee.

Please note that as of November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (CCRA).

Under a franchise agreement, a franchisor may permit a franchisee to sell, assign or transfer its rights acquired from the franchisor under that agreement to a third party. The franchise agreement generally grants to the franchisee the right, license and privilege to use the franchisor's operating system, trade name, trade marks and service marks (the "franchise rights"). Where a franchisee includes its franchise rights as part of the sale of the franchise business to a third party, a portion of the purchase price is related to the supply of the franchise rights.

Interpretation Requested

You have asked us to confirm that where a franchisee sells the franchise business to a third party purchaser and the franchisee and the purchaser jointly make the election under subsection 167(1) of the Act, the transfer of the "franchise rights" would not be a taxable supply of property by way of lease, license or similar arrangement under subparagraph 167(1.1)(a)(ii) of the Act.

Interpretation Given

The term "property" is defined in subsection 123(1) of the Act as:

"any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money."

For GST/HST purposes, the "franchise rights" would represent property.

The word "sale" is also defined in subsection 123(1) of the Act as:

"in respect of property, includes any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer the ownership of the property."

Generally, a sale will have occurred where a person transfers all of its rights and obligations with respect to a given property to another person. A transfer of an interest by way of assignment may be a sale where all the rights and obligations with respect to the interest are conveyed to another person.

It is a question of fact whether a particular supply of property is made by way of sale or by way of lease, license or similar arrangement. Therefore, if it is clear that the franchisee transfers all of its rights and obligations with respect to the "franchise rights" to a third party purchaser under the agreement for the sale of the franchise business, then subparagraph 167(1.1)(a)(ii) would not apply to the supply of the "franchise rights".

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 CCRA 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) 954-4394.

Yours truly,

J. Allard
Specialty Tax Unit
Financial Institutions and Real Property Division